Ed Kless

August 2, 2016

Episode #103: Black Swan Friday

Ed Kless

August 2, 2016

Ed’s son, Sean, had a baseball game, so rather than doing Free-Rider Friday alone, Ron did “Black Swan Friday” by interviewing two of the Canadian bookkeepers who have been through the Black Swan Mentoring Program.

Cindy Kindret, founder and owner of Kindret Business Solutions, Inc., started her business from scratch 14 years ago with 2 clients and grew it by year 8 to over 100 clients. Her home-based business today includes 3 employees, and 2 contractors. Nothing has more positively changed her business than The Black Swan Program.

Today she has less than 40 clients and generates more profit than when she had over 100 clients, has more time to think and enjoy her clients and more time to plan for a better future.

Cindy is a Certified Professional Bookkeeper through Institute of Professional Bookkeepers Canada, is a Distinguished Financial Advisor “Bookkeeping Services Specialist” through Knowledge Bureau, and is both a Sage50 and QuickBooks Pro Advisor.

Melissa Michalski, B.Comm(Hons), CPB

Melissa is one of the co-owners of CertPro Accounting Team in Winnipeg, Manitoba Canada. Her love of accounting started during high school when her mom and grandpa encouraged her to take an accounting course as an elective. She holds an undergraduate degree from the Asper School of Business at the University of Manitoba. Before joining CertPro, Melissa worked in public accounting.

She is a proud member of IPBC and a Certified Professional Bookkeeper. Melissa volunteers her time as the IPBC Regional Developer for the province of Manitoba.

Melissa was lucky to be part IPBC’S BLACK SWAN program in 2014.

She also teaches competitive dance to children ages 9-18. In her teens she represented Canada on the World Tap Team where she brought home the bronze medal.

When she isn`t crunching numbers you can find Melissa travelling to California and Disneyworld and spending time with her two cats.

Topics discussed

Why did you want to change your business model?
How scared were you? No hourly billing, no timesheets?
What’s the most critical component of pricing?
What’s your approach to the value conversation now?
Did you get pushback from your customers? How many customers did you lose?
We recommend pricing the customer, not the service
1. How do you craft your options?
2. What are the advantages of options?
Have you become more selective about customers you take on?
Explain how you manage your emotional capacity vs. your physical capacity?
What advice would you give to a bookkeeper who is thinking of making this change?
Give an example of where you created and captured extraordinary value.

Ed Kless

July 26, 2016

Episode #102: Interview with David Barrett - CEO of Expensify

Ed Kless

July 26, 2016

Ed and I were honored to interview David Barrett, Founder and CEO of Expensify, whose purpose is “To improve the world one expense report at a time.”

David is a wine aficionado, and all around alpha geek. He started programming when he was 6 and it has been his primary activity ever since, with a brief hiatus for world travel, technical writing, project management, and now running Expensify.

Since 2008, David and Expensify have been making the world a better place, one expense report at a time.

Expensify was recently named one of the Most Innovative Companies in 2015 by FastCompany. A pioneer in the expense management space, Expensify has become the model for all similar solutions.

David is married to an opera singer and has the cutest beagle in the world. David loves third world travel and first class wine, but hates expense reports.

Expensify does "expense reports that don't suck!" by importing expenses, and receipts, from your credit cards and mobile phones, submitting expense reports through email, and reimbursing everything online.

It has raised over $6 million in venture funding, has hundreds of thousands of users, has won awards aplenty, and is basically taking the small-business expense reporting space by storm.

We discussed his “Please Don’t Call Us “Cockroaches post, where he suggests the name Tardigrade instead of cockroach.

History/Biography

How’d you get here?

Company almost never happened? Started as prepaid debit card idea?

Expensify’s Non-Enterprise Sales Model

It sells to the end user and is thus pulled into organizations from the bottom up, getting around IT and procurement!

Since it started in 2008, it has spent nothing on promotion and grown to 4 million users.

As Robert Stephens, founder of Geek Squad, says, “Advertising is a tax companies pay for being unremarkable.”

Expensify uses a Freemium Pricing Model, which has led to 600,000 companies using it for free.

David’s Blog Posts and Articles

David’s blog posts, along with those discussed:

David Barrett on BitCoin

What’s your advice for entrepreneurs?

Stop getting distracted by the bad advice from others. Most advice you get is awful. You can only be an “expert” on the past.

What’s your favorite California wine?

Little Vineyards, Glen Ellen, CA

What’s been your favorite travel destination?

Railay Beach, Thailand

Ed Kless

July 20, 2016

Episode #101: Interview with Baruch Lev

Ed Kless

July 20, 2016

Ed and I were honored to have on Baruch Lev, co-author of The End of Accounting and the Path Forward for Investors and Managers (Wiley Finance) by Baruch Lev and Feng Gu, 2016.

The book is divided into four parts, which we asked Professor Lev about.

Part One: Relevance Lost

The End of Accounting and the Path Forward for Investors and Managers (Wiley Finance)

$32.01

By Baruch Lev, Feng Gu

Buy on Amazon

The End of Accounting is divided into four parts:

Relevance Lost
Why is Relevance Lost?
So, What’s to Be Done?
Implementation

Like a Consumer Reports evaluation, they provide an unsatisfactory report. Based on a comprehensive, large-sample empirical analysis, spanning the past half century, we document a fast and continuous deterioration in the usefulness and relevance of financial information to investors' decisions. The pace of this usefulness deterioration has accelerated in the past two decades.

Our analysis indicates that today's financial reports provide a trifling 5-6 percent of the information relevant to, and used by investors.

One amusing illustration they use in the book is to compare United States Steel Corporation’s 1902 and 2012 financial statements. The former is 40 pages; the latter is 174 pages. Yet they focus on the same information. Uniformity has lead to less experimentation and innovation as the world moved from an industrial/service economy to a knowledge economy.

Another indictment that what the accounting profession is peddling is the Edsel of our day, proforma (non-GAAP) earnings disclosures have doubled from 2003 to 2013, and now are over 40%.

As The Economist stated, "The real Enron scandal is that so much of what Enron did conformed with GAAP."

How much of stock prices are attributable to earnings and book values? It was roughly 80-90% in the 1950-1960s, the authors say it’s 50% today.

Part Two: Why Is the Relevance Lost?

The authors document three major reasons for why accounting reports have lost relevance:

1. The inexplicable treatment of intangible assets—the dominant creators of corporate value. Intellectual capital—such as brand development, human capital, R&D, etc., are all expensed by current accounting standards.

2. Accounting isn’t about facts anymore but more and more about manager’s subjective judgments, estimates, and projections.

3. Unrecorded business events increasingly affect corporate value (competitor moves, regulatory changes, restructurings, alliances, etc.).

Just one example, the prevalence of Mark-to-Market rules is a clear case of asking GAAP to do something it is constitutionally incapable of doing—project value into the future, because accounting is not a theory, it’s an identity equation. GAAP can only record value once a transaction has taken place.

This is why the “goodwill” of a business is booked after is has been sold. It is why our late colleague, Paul O’Byrne, FCA, used to say that goodwill is the name accountants give to their ignorance.

Warren Buffett remarked, “This is not marked-to-market, rather marked-to-myth.” As the authors point out, Enron was marking-to-market 30-year gas contracts in which they were the main market-maker.

Much of this is due to the Financial Accounting Standard Board’s obsession with the “Balance sheet approach,” adopted in the 1980s, with the prime objective to value assets and liabilities at fair (current) values. These adjustments spill over into the income statement, making it less relevant. If balance sheet is flawed, so is income statement.

Part Three: So, What’s to Be Done?

There has been initiatives to supplement the traditional financial statement report, such as with Key Performance Indicators, the Value Reporting Revolution, Intellectual Capital reports, the Enhanced Business Reporting Model, Integrated Reporting, and so forth.

They haven’t amounted to much, and they are not grounded in solid economic theory. Lev and Gu propose adding “The Strategic Resources & Consequences Report” to the financial statements. As they explain:

The focus of this Resources & Consequences Report is on the strategic, value-enhancing resources (assets) of modern enterprises, like patents, brands, technology, natural resources, operating licenses, customers, business platforms available for add-ons, and unique enterprise relationships, rather than on the commoditized plant, machines, or inventory, which are prominently displayed on corporate balance sheets.

Our proposed disclosure to investors is primarily based on nonaccounting information, focusing on the enterprise's strategy (business model) and its execution, and highlighting fundamental indicators… more relevant and forward-looking inputs to investment decisions than the traditional accounting information, we grade the ubiquitous corporate financial report information as largely unfit for twenty-first-century investment and lending decisions, identify the major causes for this accounting fade, and provide a remedy for investors.

They illustrate this report in four separate industries—media and entertainment, property and casualty insurance, pharmaceutical and biotech, and oil and gas, using real examples from various companies.

It’s an innovative and empirical approach, as the authors studied investor calls, earnings disclosures, etc., to learn what educated investors were asking to help them peer into the future potential of companies.

This is enlightened way to develop Key Predictive Indicators—that is, theories that can be used to peer into the future, rather than merely looking backwards with data that comprise most Key Performance Indicators.

Part Four: Implementation

The authors are not fans of more regulation. In fact, they advocate lessening the disclosure rules. They believe their proposals could be voluntarily adopted, perhaps with a “nudge” by industry trade associations and the SEC.

What about the retort that some of the information they want to see disclosed would lead to a competitive threat? The authors are sympathetic to this fear, but point out examples where companies have voluntarily disclosed “sensitive” information, such as one Drug company’s disclosure of pipeline info, FDA filings, clinical trial status, marketing info, etc.

The authors also advocate eliminating quarterly reporting, since frequency and reporting quality are substitutes, making it semiannual, such as in the UK and Australia, among other countries. They would still require quarterly reporting of sales, cost of goods sold, and gross margin.

Finally, they propose three reforms to GAAP:

1. Treat intangibles as assets (at cost) and improve disclosures (such as separating Research from Development)

2. Reverse the proliferation of accounting estimates—such as marking-to-market, leaving Fair Market Value to investors since accountants have no expertise in valuation. Compare the top five to seven key managerial estimates and projections to actual.

3. Mitigate accounting complexity—regulatory complexity now exceeds business complexity. A 15-year FASB revenue recognition project resulted in a 700-page rulebook! It’s futile to have a rule for every scenario. We need more principles and professional judgment, and less rules.

A Deteriorating Paradigm

Abraham Briloff, late professor of accounting at Baruch College and irritant to the auditing profession, used to say that accounting statements are like bikinis: “What they show is interesting, but what they conceal is significant.”

The accounting model is suffering from what philosophers call a deteriorating paradigm—the theory gets more and more complex to account for its lack of explanatory power.

Not Final Words

We are very curious to see the profession’s response to this book going forward. Our guess is, for the most part, it will be ignored, which would be tragic, and a missed opportunity.

The number one issue facing the accounting profession is loss of relevance. Does anyone doubt that using financial statements to run—or invest in—a modern-day intellectual capital organization is the equivalent of timing your cookies with your smoke alarm?

Thank you, Professor Lev for having the courage to challenge the profession , and offering a better path forward.

Ed Kless

July 10, 2016

Episode #100: Celebration

Ed Kless

July 10, 2016

We thanked our listeners, sponsors, VoiceAmerica Team, including our sound engineer Matt Weidner, the founder of VoiceAmerica, Jeff Spenard, and our Executive Producer Robert Ciolino, our “dreammaker.”

Ed and Ron talked about the 30 guests they’ve had on since the first show ran on July 4, 2014. Two of those guests have been on twice (Rabbi Daniel Lapin and Doug Sleeter).

A special thank you to all of the following guests for appearing on TSOE:

Deirdre McCloskey, August 8, 2014
Rory Sutherland, August 29, 2014
Howard Hansen and Steven Geske, September 12, 2014
Father Robert Sirico, October 17, 2014
Reed Holden, Oct 31, 2014
Rabbi Daniel Lapin, Nov 14, 2014 (twice: April 1, 2016)
Tim Williams, Dec 5, 2014
Jody Thompson, ROWE, CultureRx, Dec 12, 2014
Thomas Sowell, December 19, 2014
Adam Davidson, Jan 9, 2015
Jules Goddard, Jan 16, 2015
Dan Morris, Feb 6, 2015
Joe Pine, March 6, 2015
Robert Cross, March 13, 2015
Anthony Clark, March 20, 2015
Dan Ariely, May 8, 2015
Brad Smith, May 22, 2015
Kevin Mitchell, PPS, June 12, 2015
Lee Cockerell, Disney, June 19, 2015
Greg Tirico, July 17, 2015
Jennifer Warawa, August 14, 2015
George Gilder, Sept 11, 2015
Daniel Susskind, Jan 8, 2016
Mark Koziel, AICPA, Jan 15, 2016
David Wells, Matthew Burgess, John Chisholm, Feb 19, 2016
John Jantsch, Duck Tape Marketing, March 11, 2016
Paul Kennedy: The OBK Story, March 18, 2016 (done live in UK)
Rabbi Daniel Lapin, April 1, 2016
Dr. Mark Miller, April 22, 2016 (Books: The Moral Case for Fossil Fuels, and Fueling Freedom)
Astronaut Rick Searfoss, May 6, 2016
Doug Sleeter, Part I, June 10, 2016
Doug Sleeter, Part II, July 1, 2016

Access to all of these shows can be found on our archive page.

Memorable Shows

Scroogenomics, Nov 28, 2014 (“Black Friday”)
Business Lessons from A Christmas Carol, December 18, 2015
Our First Free-Rider Friday, January 30, 2015
Live from Sage Summit July 28-30, 2015
Famous Last Words, October 9, 2015
Live at the VeraSage Symposium, Nov 20, 2015
Live at the Texas Libertarian Party Presidential debate, April 9, 2016

Carry-Over Items from Last Two Shows

Ron eat crow for wrongly predicting Brexit vote would lose. www. predictit.org and a lot of the polls got it wrong, too.

Proposed referendum names for other countries thinking of leaving of the EU:

Quitaly
Dumpmark
Byerland
Withdrarsaw
Portgugone
Madriddance

As a follow-up to our shows with Doug Sleeter on the blockchain, Ron discussed the “Bitcoin Knowledge Podcast” hosted by Trace Mayer. Two shows he listed to and enjoyed: an interview with Jeffrey Tucker and one with Dr. Adam Back, a legend in Bitcoin developer circles.

Dr. Back discussed his innovation of Sidechains, which is one of the pet projects on the developer’s wish list of “cool features.”

A sidechain essentially suspends your Bitcoins on the main blockchain, then sends them to a smart contract guided sidechain, with proof of suspension, and grants you equivalent use of the Bitcoins on the sidechain.

It’s a way for them to add new features in a modular way. For instance, a sidechain could be used to run an airlines’ frequent flyer program, or for anything where you might need a ledger with special features.

If anyone is planning on attending the Sage Summit, use promo code FOE (Friend of Ed) for special pricing.

As always, we’d love to hear your favorite guests, shows, topics, and/or guests/topics you’d like to hear on The Soul of Enterprise.

Thank you everyone for listening and on to our next 100 shows!

Ed Kless

July 5, 2016

Episode #99 - Interview with Doug Sleeter, Part II

Ed Kless

July 5, 2016

We had such a good response from our first interview with Doug Sleeter on the Blockchain, we got him back to take a deeper dive on this fascinating meta, and disruptive, technology.

Doug’s Biography

Doug Sleeter (@dougsleeter) is a passionate leader of innovation and change in the small business accounting technology world. As a CPA firm veteran and former Apple Computer Evangelist, he has melded his two great passions (accounting and technology) to guide developers in the innovation of new products and to educate and lead accounting professionals who serve small businesses.

Doug has been named one of the “Top 25 Thought Leaders” by CPA Practice Advisor for several years, as well as one of Accounting Today’s “Top 100 Most Influential People in Accounting” from 2008 through 2015. He was recently awarded the Small Business Influencer Champion award. Doug is the founder of the Sleeter Group, an active member of the Accountex Leadership Council, author of numerous books, and writes regular columns for the Sleeter Report and CPA Practice Advisor. Doug and his family live in Pleasanton, CA.

Segment One

We discussed:

The Trust Protocol, or Trust Machine—trust the math, not the people
“In Math We Trust”
Blockchain holds institutions more accountable for their actions. Imagine if you could track each dollar you gave to the Red Cross from its starting point on your smart phone to the person it benefited
What is a distributed autonomous enterprise (DAE)? Essentially it is a cooperative owned by its members.
Blockchains automate away the center
Puts Uber out of a job and lets the taxi drivers work with the customer directly
https://slock.it has potential to disrupt lots of business models, including airbnb and uber

Segment Two

Is it all too complicated?

How many people know there are seven layers to the Internet?

Micah Winkelspecht, CEO of Gem, nation’s first blockchain solution providers said, “In the future, people won’t talk about blockchains any more than they now talk about the lower level architecture that makes the Internet work. We’ll just use them every day without thinking about it. Their presence will be ubiquitous.”

Philosopher Alfred North Whitehead said, “Civilization advances by extending the number of operations we can perform without thinking about them.”

What is Triple Entry Bookkeeping?

Today, companies record a debit and credit with each transaction—two entries, hence double-entry accounting.

They could easily add a third entry to the World Wide Ledger, instantly accessible to those who need to see it—the company’s shareholders, auditors, or regulators.

Blockchain can also deal with micropayments—those going beyond merely two decimal places. It would also mean no more “float.”

How disruptive to CPAs?

Auditing is a multibillion-dollar industry controlled by four massive audit firms.

According to the book, Blockchain Revolution: “Traditional accounting practices will not survive the velocity and complexity of modern finance. New accounting methods using blockchain’s distributed ledger will make audit and financial reporting transparent and occur in real time.”

“Accountants are like mushrooms—they’re kept in the dark and fed shit,” said Tom Mornini, CEO of Subledger, a start-up targeting the accounting industry.

If every transaction globally distributed ledger, who need public accountancies to translate for us?

Deloitte Touche now has 100 people in its cryptocurrency group, spread out in 12 countries.

Eric Piscini, who heads up the Deloitte cryptocurrency center, tells clients that the blockchain is “a big risk for your own business model because now the business of banking is to manage risk.

Overripe for disruption is the audit business, and audit is a third of Deloitte’s revenue. Piscini said, “That’s a disruption to our own business model, right? Today we spend a lot of time auditing companies, and we charge fees accordingly. Tomorrow, if that process is completely streamlined because there is a time stamp in the blockchain, that changes the way we audit companies.”

Or perhaps eliminates the audit firm altogether?

Deloitte has developed a solution called PermaRec (for Permanent Record) whereby “Deloitte would record those transactions into the blockchain and would then be able to audit one of the two partners, or both of them, very quickly, because that transaction is recorded.”

Will investors demand triple-entry accounting to meet corporate governance standards?

After all, he argues, “Who is going to invest in a company that shows you what’s going on quarterly, compared to one that shows you what’s going on all the time?”

Is the Blockchain the beginning of the end for auditors and bookkeepers?

Segment Three

Bill Gates once said: “We overestimate technology’s short-term impact, and under-estimate its long-term impact.” Are we doing the same with Blockchain?

Could we have several different blockchains, for different purposes? This is Doug’s biggest fear.

He envisions one, trusted, public blockchain. Many blockchains could fail due to incompatibility. There would also be more innovation due to the open source nature of the code, since there would be only one target to improve (like Wikipedia).

Check out https://github.com, for the open-source code for blockchain.

There are skeptics

Don and Alex Tapscott lay out ten showstoppers that could derail blockchain in their book, Blockchain Revolution:

THE TECHNOLOGY IS NOT READY FOR PRIME TIME.
THE ENERGY CONSUMED IS UNSUSTAINABLE.
GOVERNMENTS WILL STIFLE OR TWIST IT.
POWERFUL INCUMBENTS OF THE OLD PARADIGM WILL USURP IT.
THE INCENTIVES ARE INADEQUATE FOR DISTRIBUTED MASS COLLABORATION.
THE BLOCKCHAIN IS A JOB KILLER.
GOVERNING THE PROTOCOLS IS LIKE HERDING CATS.
DISTRIBUTED AUTONOMOUS AGENTS WILL FORM SKYNET.
BIG BROTHER IS (STILL) WATCHING YOU.
CRIMINALS WILL USE IT.

Segment Four

Doug discusses “Big Bad Data” and how blockchain can overcome this problem.

The Economist had a story that a doctor is attempting to use blockchain for clinical drug trials, making the data from them more accurate and less susceptible to manipulation.

What do we mean by trust? The Tapscott’s list four principles of integrity: honesty, consideration, accountability, and transparency.

There’s a Chinese Proverb that teaches: “When the wind of change blows, some people build walls, others build windmills.”

Should we be investing in Bitcoin and blockchain companies?

Venture capital is pouring into startups in this area, destined to be an enormous growth area in the coming years.

You can learn how much from www.coindesk.com, which has a listing of the amount of venture capital being invested at http://www.coindesk.com/bitcoin-venture-capital/.