I have just spent 10 minutes writing a comment to this posting over on Accounting Web, then thought that it would be better to set out my thoughts here.

There is a fundamental misunderstanding in the Accounting Web discussion, when contributors state (rightly to some extent) that transactions cannot be keyed into the online accounting services, like Xero, Kashflow and Free Agent as quickly as in desktop software, like Sage and QuickBooks.  The problem is speed, many say.

If your practice is providing what I would term “binge bookkeeping” services, meaning processing client records in batches, perhaps monthly or quarterly, then there is little benefit from using online accounting systems for 3 reasons:

1. the client is clearly not interested in maintaining accurate, up to date accounting records, so there is no need for real-time reporting
2. because the client does not need real-time information, there is less downside in sending backup files to the accountant and back – indeed perhaps the data file is permanently with the accountant, with the client only having financial information provided in the form of reports produced by the accountant, and
3. data in batches can be entered more quickly using the interface of desktop software compared with web-based software (with the exception of live bank feeds and bank statement upload files)

However, if you wish to provide a management accounting service, in collaboration with your clients, then online is the only way to go.  The client would typically enter most of the transactions themselves, in very small numbers but very frequently – i.e. daily.  No speed problems here then.

The accountant’s role is to monitor, review, correct and complete the records – then use the real-time numbers to help the client manage and grow their business.  Doing the “clever bits”, like calculating and posting depreciation or making the stock adjustments at the month end, is high value but low transaction volume work.  Again, speed is not therefore an issue.

So my argument is that web-based accounting systems are modern tools to enable delivery of modern services. Accountants can stick to traditional desktop tools if all they want to deliver is a traditional service.  I know which horse I would rather have my money on in that particular distance race.

I met up with Hamish Edwards and Darren Glanville from Xero online accounting software yesterday, when they dropped in to the Pearson & Associates offices.

It was good to meet Hamish for the first time, after previous telephone and cyberspace conversations.  Most of the talk was about how Xero could help us with the process of converting clients from other systems, such as Sage and QuickBooks but we also discussed Xero’s broad development roadmap.  Hamish revealed that one of the things they were working towards is what he described as a “One Ledger” concept.

Now, I must admit that I didn’t grasp the significance at the time but now, having had chance to think it through, it strikes me that One Ledger could have profound implications for most small accountancy practices.

So what are we talking about here?  Well, the big idea (and it’s not rocket science) is to use the same data set (the client’s) for the production of year-end “final” accounts rather than what currently happens – which is that the accountant takes the client’s accounting data and transfers it into his own software for further processing and final accounts production.  Using the One Ledger approach, the need for the accountant to produce separate working papers is eliminated, as is the chore of revisiting the client’s data after the final accounts are produced to make adjustments to correct the opening balances for the new financial year.  The client’s accounting data IS the working papers and IS the lead schedules.

One significant development that will make this possible is what Hamish described as an intermediary coding structure which will allow individual general ledger account codes in a Xero (client’s) chart of accounts to be mapped to the appropriate code in the Xero statutory chart of accounts.  It’s my understanding that, by default, this functionality will only be visible to users with the “Financial Adviser” role in Xero.  Accountants typically reserve this role for themselves, where they have setup the client initially, but there is nothing in principle to stop a client using the extra functionality if they wish to.  This means that, for instance, abbreviated accounts for Companies House can be generated without the intervention of the accountant.  Now tell me that is not a fundamental shift in the balance of power of the client / accountant relationship.

I see this as a positive change, it allows the accountant to distance himself from the traditional compliance service and, instead, demonstrate how he can add value to the process, DURING the process – not just at the end by facilitating filing with the authorities.

Of course, the One Ledger principle cannot realistically work for desktop accounting systems such as Sage or QuickBooks, simply because the client cannot run their business without access to their accounting data during the time it takes their accountant to “do the books”.  This is therefore a way of working that only web-based providers, like Xero, can offer.

I can see some potential problems – such as how to get the tax provision into a set of limited company accounts without first importing accounts information into the practice’s corporation tax software – but I can also see big benefits for both the client and the accountant.  The accountant’s role will change though, to one of reviewing and correcting the client’s data before the client files the accounts, instead of owning the whole process – and charging accordingly.