It is quite common for CPA firms and other accounting companies to postpone troubleshooting mismanagement of their bookkeeping to the month of December. But this approach leaves them without profits, accurate records, and a loyal clientele. Most accounting firms think Q4 is only for taxes and will do their bookkeeping cleaning and reconciliation rather late in the year.
The firms that work efficiently in producing clean returns and achieving high client retention take this cleaning timeframe three months ahead of December.
The main reasons for this are explained below.
The 90-Day Math Nobody Talks About
Books tend to be decaying over time. As more time elapses with the errors present, new entries build on those incorrect entries. Because of this process of compounding errors, a transaction error that would take a few minutes to fix initially can become a disaster months later.
One important metric that people can forget is how long it takes for errors to be fixed. A firm can take as much as three times longer to fix an error for every quarter it goes uncaught. For example, if the error is discovered in October, the repair shouldn't last longer than five minutes but by December it can take hours to analyze all the optional entries that reference the same initial transaction.
What October Cleanup Catches That December Cleanup Can't
Around the time October arrives, a business has kept its record for well over nine months - enough time to explore any hazardous trends that arise. The following are a few categories to ensure one hunts for:
Repeated reclassification. A single instance of classification error may be regarded as an anomaly. However, the occurrence of a particular error several times in the nine-month period indicates that a systematic error is taking place in the internal processes of the client company.
Vendor and subscription growth. In nine months, issues associated with multiple subscriptions, automatic renewals or vendor charges are likely to become apparent.
1099 exposure gaps. In cases where contractor payments have not been correctly categorized, a full three-month grace period is required for correction so that the proper filings can be submitted. If such issues are discovered in December, the firm would need to conduct corrections in the following quarter rather than submit accurate filings as originally scheduled.
Sales tax nexus drift. October is practically the last chance any entity involved in interstate commerce must realize that it owes a tax in several states for any activity that has gone over the economic nexus threshold so that itself cannot realize it’s liable in the upcoming busy quarter.
The Part Most Firms Underestimate: Client Psychology
This is something that does not appear anywhere in the cleanup checklist, but you can be sure it will appear in the retention statistics. Clients relate to "surprise findings" differently depending on the timing of such findings.
If a discrepancy is flagged back in October it will seem like diligence - the company found an issue early enough and has practically done everything necessary to allow a client to adjust. The same discrepancy flagged in December will hit like a bomb. The whole thing will happen just before the tax deadlines and holidays and clients will remember the troubles they have gone through much more than the accuracy of the work done.
Companies that move the cleanup to October do not only perform more efficiently, but they also change the entire perception of the client in terms of the relationship they have with the company.
The Capacity Argument: Protecting Your Own Team
The October cleanup process serves a dual purpose: it is helpful to clients as well as to staff members. The period between December and April is one of the most hectic periods for a bookkeeping and tax services company. Any time your team spend disentangling a client's accounts in December is time taken away from an already very busy season.
Moving the cleanup process forward helps to ensure better accounts and less heavy workload for the staff.
A Quick Benchmark: What "Clean" Should Mean by October
Here’s a handy checklist for auditing your firm’s processes. By the end of the month of October, there should be:
1. Bank and credit card accounts reconciled up to September
2. All accounted transactions (and not just “reviewed”)
3. AR and AP aging reports, to see if there’s anything stale or written off
4. Fixed assets and depreciation schedules updated
5. A preliminary W-9 flagged vendor list
6. Sales tax vs current year revenues, state by state.
If several of the above are missing in several client books by the end of October, it indicates significant gaps in the clean-up process that can hurt before the start of peak season.
Where This Gets Hard for Firms - and Where the Leverage Is
Here’s the real dilemma: knowing October is indeed the right time to resolve the problems doesn’t mean the resources will magically appear. Most companies are already stretched thin with staff already engaged in ongoing work so it would be difficult to expect them to disengage senior professionals from the customer’s business to fix nine months’ worth of misclassified transactions in numerous records without hiring additional staff which is unnecessary at this time in January.
This is exactly the type of work that can be performed more efficiently by a separate team rather than taking people from your own team to do it.
Xconcile’s Outsourced Accounting & Bookkeeping service is dedicated to doing exactly this kind of catch up and clean up activity – Chart of Accounts improvement, transactional reconciliation and quality control that allows spotting all the mistakes mentioned above on a standard basis between 24 and 48 hours.
When it comes to cleanup, it seldom ends with the general ledger. A number of related issues can be resolved at the same time:
- Multi-State Sales & Use Tax Compliance can help your multi-state clients learn about possible nexus drift ahead of time, so they are able to avoid any notices.
- After cleaning up the books, it is possible to offer Outsourced Tax Preparation services, so that the clean data can be used for the tax return preparation process without the need for another round of checks this April.
- For those clients who need more than just cleaned-up books, Virtual CFO & FP&A services enable the accounting professionals to turn the October cleanup into a real planning process for 2027.
Having this as a logical process instead of three different undertakings is how firms have clean files in January instead of a lot of undone work.
Would you like to learn what the October cleanup means for your clients? Contact us for a free consultation, so that we can point out any missed opportunities.
