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Should you buy Bill.com stock? · The Accounting Podcast

• David Leary: People are lazy. They use the same email; they use the same passwords. So, you, as a firm owner, you could put in your clients email addresses that they're using to log into their accounting system with, and you could provide a value to them and let them know that, "You probably need to change your passwords because your email and password have been breached." Blake Oliver: Welcome to The Cloud Accounting Podcast. I'm Blake Oliver. David Leary: I'm David Leary. Blake Oliver: And it's Friday before the week of Christmas ... Winding [00:00:30] down here. David Leary: This is the big shopping day, right, everybody goes shopping this last Friday? Blake Oliver: I have to mail some stuff, and I'm kinda worried about going to the post office this afternoon. David Leary: There's probably a service, right? You could just have it picked up. Blake Oliver: You get an app or something and they'll do it? David Leary: Scale, right? Blake Oliver: I'll just Uber all my packages to their destination this year. David Leary: I heard about a service like this- Blake Oliver: Really? David Leary: -but it's really for overseas shipping. It's a mule. If you have extra room in your suitcase and I wanted to ship a bottle of wine to my friend in Italy - I don't know why I would do that, but - I could pay ... I'd pay you to carry my bottle [00:01:00] of wine in your suitcase, and then I avoid a bunch of headaches of shipping. Blake Oliver: Right. David Leary: I think it might be called Mule or something. I'm not sure. Blake Oliver: That's a funny name. Hopefully it is wine that you are carrying if you subscribe to this service or if you act as a mule. We thought we weren't gonna have a lot of stories to talk about, but I actually found a ton of stuff. We've got follow up on Bill.com and their IPO and investor scrutiny; talking head scrutiny more like it. [00:01:30] I've got a follow up on the California Fi$Cal fiasco with the accounting system that we're building here in California; the stories just keep on coming. I've even got a really fun one about an accounting firm owner who had to change his name in order to make an acquisition happen, believe it or not. David Leary: Change his name or his firm's name? Blake Oliver: His name; his own name. David Leary: Oh, interesting. Blake Oliver: Yeah. David Leary: I don't wanna wait for this one now. You just gotta- at the risk of losing listeners. You gotta tell me now. Blake Oliver: Okay. All [00:02:00] right. This is my top story of the week: "Aprio combines with leading North Carolina accounting firm LBA Haynes Strand." Aprio is a Top-50 accounting firm. I think it's the only Top-50 firm that doesn't have a traditional name where it's one of the partner's names; based out of Atlanta. They're growing fast. They're a Top-50 firm. They've been on an acquisition spree. They are led by Richard Kopelman. He's the CEO and managing partner. They were acquiring a firm in North Carolina ... [00:02:30] North Carolina is one of those states that still has a very traditional rule about CPA firm names, that the name of the partner, or at least one of the partners, has to be in the name of the firm, and Aprio doesn't. So, how could they acquire this firm in North Carolina? Well, they realized- David Leary: He changed his last name to Aprio? Blake Oliver: He changed his middle name. He added a middle name. His name is legally now Richard Aprio Kopelman, yep. David Leary: Wow! That's amazing. Blake Oliver: Yeah. Very innovative solution to a legal challenge. If you're having this issue, if you're in a state [00:03:00] where your state requires you to have one of your names in the name of the firm, then this is how you could get around it apparently. David Leary: I love it, actually. I love the big sticking it to the government man like, "All right. That's your rule, here we go." Blake Oliver: Yep. David Leary: That's awesome. That's a good find. Blake Oliver: I know. It's funny. It's a little legacy from, you know, back in the day, which wasn't that long ago. I think it's '70s when CPA firms weren't allowed to advertise, and they had to have a traditional name. It's only been, you know, since then that we've been [00:03:30] able to operate like real businesses. David Leary: I have a- what story is it? I have a password breach that everybody needs to be very aware of because I guarantee it affects 100 percent of your clients. What else do I have? I got Bill.com; again, negative stuff about that on why you- Blake Oliver: Should not? [crosstalk] Okay. I've got the positive side, so we'll see. David Leary: Xero has a partnership with another payroll company. I'm kind of wondering if Xero is becoming a niche app for farmers. We can jump into that. Another payroll startup, so just ... Even though, last week, we talked about- or two weeks [00:04:00] ago, is the gold rush of startups for SaaS apps dead? New ones are still coming to the market. Teaser story. Since you gave away yours, I'll give one away. Blake Oliver: Okay. David Leary: There's a tweet from Matt Paff. It was from Australia, and it was: "Cheque Payments per Capita," and it basically shows the last five years, right? Oh, no, the last 20 years, '99 to 2019 is 20 years- 20 years of check usage per capita. Blake Oliver: So, paper checks- David Leary: Paper checks. Blake Oliver: - per person in Australia. David Leary: Spoiler alert, it's basically almost zero in 2019. Blake Oliver: Yeah. David Leary: It's an amazing chart. It speaks for itself. [00:04:30] It's just amazing. Blake Oliver: Well, they went from over 40 percent back in, it looks like, early '90s, to almost zero percent in 2019. Yet, in the U.S., I think we're in that situation where something like 40 percent of payments, at least business payments for sure, are being made by check still; maybe more. David Leary: So, we've still got 20 more years of checks. Blake Oliver: Yeah, I can't remember exactly what the stat is, but it's a lot. Well, and that takes us to Bill.com, the news about that. David Leary: Yeah. Blake Oliver: I think before we talk about Bill.com, we should read the review. David Leary: Yes, we had a great review this week [00:05:00] on Podchaser. Blake Oliver: This is from Karen Bertrand of ClearCloud Bookkeeping LLC. "I am totally not your target audience. Owner of tiny potatoes bookkeeping practice. I've been a freelancer for years with my head in the accounting technology sand while the industry moved along and beyond me. I somehow woke up about six months ago and stumbled onto your podcast. You've helped to open my eyes to what's out there in the virtual accounting world and where it can lead me. I've turned my freelancing into a legit biz, and your fun and informative podcast deserves at least a little [00:05:30] of the credit! Thank you!" Well, that's pretty great to hear. I would say, Karen, no, you are our target audience. This is for accountants, bookkeepers - all the way from freelancers up to big firms - especially those who are interested in the intersection of accounting and tech. So, if that's you, thanks for listening. David Leary: I would say if you have a friend who's a bookkeeper or an accountant that's a bookkeeper, that maybe they're not on top of where we're at in this space, give them the gift of The Cloud Accounting Podcast for Christmas. That is a great thing you could do for somebody, because [00:06:00] I think this is two weeks in a row, now, we've had a review where it's been- legitimately changed someone's business and life. Blake Oliver: Let's get to the news, shall we? So, Bill.com. It's really weird. Occasionally, I'll turn on the TV during the middle of the day because I work at home and Jim Cramer will be on. I don't listen to Jim Cramer, but I just like watching him because he's insane. I mean, the show's called Mad Money, right? He's talking about Bill.com now. There was an article on CNBC summarizing what he said on his show, which is basically that he- well, [00:06:30] for anyone who's not been paying attention, Bill.com IPO-ed, what, two weeks ago? A week ago? David Leary: Yeah. It's less than seven, eight days. Blake Oliver: It popped 60 percent. I think, today, it's at $38. When Jim Cramer was talking about it on his show, it was at $36. He's saying that, right now, if you didn't invest already, you should wait; $36 is a bit too pricey. He says if it comes down to $32, then you should pounce. He says, "I like Bill.com as a play on the digitization of an underutilized, [00:07:00] underserved market of small business but, for the moment, I think it's a little too hot." Then, today, I came across an article on Quartz - Qz.com - called "Traders May Be Betting That Bill.com will be Acquired." Again, further speculation about why did Bill.com pop when a lot of companies that have IPO-ed this year have not done so well. David Leary: Yeah, I find this interesting- you said acquired. Blake Oliver: Yeah. Well, this is speculation by an analyst at New Constructs. This article is featuring Sam McBride. He does an analysis showing [00:07:30] Bill.com versus Xero, MasterCard, Visa, Adyen, Intuit, PayPal, Square; showing their market cap, price-to-earnings ratio, and their price-to-sales; really lays out that Bill.com is at a very high price-to-sales ratio. It's more than double that of Adyen, which is a very fast-growing payments company. It's also higher than Intuit; more than double Intuit's. If you're investing in Bill.com right now, you're either betting that they're going [00:08:00] to be able to hit profit margins comparable to Intuit and hit 25-percent compound annual revenue growth for the next 11 years, or are you betting that they're gonna get acquired? David Leary: Well, if somebody was in the market to acquire them wouldn't they have done it before they went public? Wouldn't it have been cheaper? Blake Oliver: Yeah, probably, but I mean ... David Leary: Unless that person that wanted to acquire them was betting that the stock was gonna go down and they were gonna get it for cheaper [crosstalk] Blake Oliver: Yeah, I don't know. Yeah. Another factor is that René Lacerte, the founder and CEO of Bill.com, he has done [00:08:30] deals like this before. He sold his previous company, PayCycle, to Intuit in 2009. Anyway, this analyst is saying stock traders could be betting that he's gonna do it again. It would take a pretty big company to buy Bill.com but their market cap is $2 billion; Intuit is $66 billion; PayPal is $123 billion; Square is $28 billion. They could do it ... Some of these larger players - Visa or MasterCard - could do it. David Leary: Yeah. I was gonna say, one of the big huge banks or something, possibly, but what's in it for them? It'd be interesting to watch. I [00:09:00] have an article about four reasons to avoid the stock. I'm actually overall, though, surprised Bill.com is getting this much national attention- Blake Oliver: It's pretty awesome. David Leary: - from the market. It's arguably- in the grand scheme of things in the world, it's a teeny little app that adds onto accounting systems in the grand scheme of the world, and it's getting this much attention. It's a little crazy. Here's the four reasons this guy wrote up on why to avoid Bill.com's stock. Blake Oliver: Who wrote this? Where was this? David Leary: This is an article in Forbes. It's written by Peter [00:09:30] Cohan. He's a management, consulting, and venture capital firm. Blake Oliver: All right. What are the four reasons I should not buy Bill.com stock? David Leary: The first reason is it's losing money and burning cash. They had a net loss of $7.3 million in the year ending June 2019 and a negative free cash flow of $8.2 million. The second bullet - competition is fierce. He listed out specific challengers, like Intuit, PayPal, startups like Stripe and Tipalti. There's like 40 players that compete with Bill.com. [00:10:00] Blake Oliver: Right, and yet, none of them have figured out how to get the accounting firms on board in any large numbers, and that's half of Bill.com's business. David Leary: Yeah, and that's what René did very well with PayCycle. When he grew PayCycle, he really got a lot of traction with the accounting firms early on. I'm gonna read this: "Though impressive, with a CEO whose startup was acquired by Intuit, Bill.com's René Lacerte lacks experience running a public company." Blake Oliver: Yeah, I think this guy doesn't know who René Lacerte [00:10:30] is, and his long history in the tech world. Just because he hasn't run a public company doesn't mean- David Leary: And I think his family's history, as well. Blake Oliver: Yeah, the whole- David Leary: Like he has generation of generation of generation of generation of entrepreneurial successes. Blake Oliver: This is funny, right? It's like, now, suddenly people are paying attention to Bill.com, who never knew what it was. We've been following it for 10 years or more. David Leary: Yeah. Blake Oliver: You know, some ignorance is to be expected. David Leary: Then the fourth reason - which you kinda got into - was the valuation is high; the price-to-sales ratio. Blake Oliver: Yeah, they've got a lot to live up to. David Leary: I [00:11:00] have a feeling, the way this is headed, we will be talking about Bill.com stock, and the market, and the way it's reacting to it the next three, four months here. Blake Oliver: Hey, I got a follow-on to the California Fi$Cal accounting system woes. David Leary: You mean the billion-dollar fiasco? Blake Oliver: The $1.1 billion-dollar fiasco. This is an article in The Sac Bee, Sacramento Bee. It's featuring an audit report, an audit of the new accounting system project that was released [00:11:30] December 17. Here's the crazy part - Fi$Cal is claiming, a spokesperson from this Fi$Cal project, claims the program is 93-percent functional since July. It has been processing $305 billion in annual spending, and it's handling $2 trillion in banking transactions for the state treasurer's office. Yet, according to the state auditor, more and more California state agencies are missing budget deadlines because the program still has major problems that are unaddressed despite its escalating cost. [00:12:00] 62 state government departments missed an October 2019 deadline to submit financial statements to the state controller's office, up from 48 for the 2017-2018 fiscal year. These delays potentially threaten the state's ability to produce annual financial reports on time, which could undermine California's credit and drive up borrowing costs by billions of dollars. The program has, so far, cost us $1.1 billion but could cost us billions more if our credit rating degrades because we're not [00:12:30] able to do accurate financial reporting. David Leary: I think the lesson here, as we watch California doing this, is - you'll see this at small businesses, you'll see it at corporations, you'll see it at accounting firms - sometimes it's cheaper just to buy an off-the-shelf solution that maybe gives you 98 percent of what you need done versus building this long road of death; building something custom that it basically never gets finished. Blake Oliver: Yeah, this is probably the worst example- well, I bet there's worse [00:13:00] examples, but this is the worst example of build-it-yourself that I've ever seen; like totally going wrong. David Leary: Well, I think we've talked about that even last week. Even Illinois is making fun of them about this. You know you're in trouble when the Illinois state officials are making fun of your state because of corruption and mismanagement. Remember iNSYNQ? We were talking about iNSYNQ hosting when they got the ransomware attack? Blake Oliver: Yep. This episode of The Cloud Accounting Podcast is sponsored by OnPay. Many times, when choosing a payroll service, you have to choose between a new startup with a great app, or an established company whose tech may feel a little behind the times. With OnPay, you get the best of both worlds - a great app from an established company that's been providing payroll for over 30 years in all 50 states. OnPay is an easy-to-use, full-service payroll with simple, straightforward pricing, and it includes all their features - employee self-onboarding, HR tools, health insurance, worker's comp tracking, and 401(k). With an accountant's dashboard and partner program combined with best-in-class integrations with Xero, and QuickBooks, OnPay is the right fit for all your clients, whether they have just one or 500 employees. They also handle all the complicated stuff that other payroll providers don't, like agricultural payrolls, including Form 943, multi-state payrolls, and employees with H-2A visas. I'm really excited to tell you that OnPay is offering an exclusive promo code only for the listeners of The Cloud Accounting Podcast to get three free months of OnPay payroll service for any of your clients that you set up by February of 2020. Head over to CloudAccountingPodcast.promo/onpay. That is Cloud Accounting Podcast dot promo forward slash O-N-P-A-Y, and use code "CAP3FREE," when you sign up your clients. That is C-A-P, the number 3, F-R-E-E. And to be clear, you cannot get this promo anywhere else. It's only available to the listeners of the Cloud Accounting Podcast. Blake Oliver: Well, speaking of companies and their problems, did you hear about Liberty Tax? I mean, it's been kind of an ongoing issue over the last year. They recently settled with the Justice Department. This is an article that appeared in Accounting Today [00:16:00] that I spotted earlier this month, but we haven't gotten around to it yet. Since tax season is coming up, I figured this might be of interest. Franchise Group Inc. is the parent company of Liberty Tax Service; these are the franchises where you can get your taxes done. You walk in; it's like an H&R BLOCK. They've got the people on the sidewalk that are dressed up like the Statue of Liberty with the signs. David Leary: Yes. I see them everywhere. I wave all the time. Blake Oliver: Liberty Tax has settled with the Department of Justice, and the IRS regarding [00:16:30] an investigation into the company's compliance program. They've agreed to certain conditions. Under the order, Franchise Group, the parent company, agreed that it would not rehire or engage the company's former chairman, John T. Hewitt, "under whose watch the conduct at issue occurred, according to a statement from the company. Franchise Group will also pay the IRS $3 million dollars, the statement added, stressing that the problems were issues of the past. The Department of Justice complaint alleged that Liberty failed to [00:17:00] maintain adequate controls over returns prepared by franchisees and failed to prevent the filing of potentially false or fraudulent returns prepared by those franchisees, despite notice of fraud at some of the franchised stores. Some of these stores that had actions filed against them were designated as Elite 18 franchises because their performance and attitude set the standard for Liberty Tax Service organization. These are top franchisees at Liberty Tax, and there were common patterns alleged by the government at these franchisees, including [00:17:30] concocting income for customers to claim the earned income tax credit, fabricating expenses to reduce income tax liability, claiming improper or false dependents, and falsifying education expenses. That's a big deal because Liberty Tax filed 1.6 million returns between 2015 and 2019 annually; for tax years 2012 to 2018, claimed more than $28 billion in federal refunds. David Leary: Yeah, so it sounds like a culture thing. Remember when we interviewed Kelly Richmond Pope? Blake Oliver: Mm-hmm, yep, at Intacct Advantage. David Leary: She was talking about how [00:18:00] if you have a culture that is unethical, that's how these things continue to happen. Like you said, these top performing franchises have the same patterns. I have a story about ... Two banking-related stories. One is just a good example of how the world could be. QuickBooks is launching a start Startling bank integration. Blake Oliver: Like startling, like "I'm startled?" David Leary: S-T-A-R-L-I-N-G ... No "T," I guess. It's just Starling. Starling. Blake Oliver: Starling Bank, okay. David Leary: Starling Bank. "QuickBooks launches Starling [00:18:30] Bank integration for SMEs." This is just an example of it's possible to have banks with a good API that have nice API connections to accounting software. Blake Oliver: Yeah, if you're not in the United States. David Leary: Exactly. Not in the United States because, in the United States, we have situations ... Did you hear about Venmo and PNC's fight? Blake Oliver: Oh, yeah. We didn't talk about that last week. PNC shut off access for Plaid, [00:19:00] which is what Venmo was using to verify bank account numbers and routing numbers, so now hundreds of thousands of Venmo customers and PNC customers couldn't use Venmo. David Leary: Yeah, and it's starting to be a public fight on Twitter because what's happening is PNC's telling people, "You should switch and use Zelle," which Zelle is essentially the peer-to-peer payments app that the banks have built for their own consumption to keep the third-party players out of that game; third-party players being Venmo, PayPal, et cetera. Venmo is telling [00:19:30] people to tweet that it's their data and that they should be able to own it. This issue just continues - this fight between the banks and fintech. Every week I feel like we're covering another story with this. It's funny, I found some old tweets I did from 2009 and 2010 about the number-one use case in the future is gonna be who owns the data - is it the bank's data, or is it my data? Banks are drawing a hard line here that it's their data, but I think, ultimately - because we talked about this last week - the customers are gonna win. Whoever has the customers is gonna win. What that means by "who has the customers" is who is [00:20:00] the customer loyal to, right? Blake Oliver: Mm-hmm. David Leary: Honestly, I think they're going to stick with the apps, and the fintech companies versus a bank. Blake Oliver: Yep, I agree with you. Let's talk about best practices for running a firm. I feel like it's the end of 2019. If you're a firm owner, you might be thinking, "What can I do differently in 2020 to make my practice better?" I've got a small tip that I think could make a big difference. I've really liked this article by Ed Mendlowitz in [00:20:30] Accounting Today about his firm and how the CEO at their firm, Bill Hagaman, sends a weekly Monday morning email and at least one new client email a week to everyone in their firm. The Monday-morning email is an update about what's going on in the firm, and the new client email is about, "Here's a new client we won; here's how we got the lead and by whom; here's the team that was assembled to scope the client's needs - who worked on it, delivered the proposal, who's gonna work [00:21:00] on the project, the services for which they engage, and the approximate fees." This is really important for a firm like Withum because they are growing. They're spread out in 12 offices. They've got 1,200 staff. These emails help educate everybody in the firm about all the different services that the firm offers and calls out people who are successful in getting new clients and new business. If you're not doing it, start sending out those client-win emails, even if you're in an all-in-one office because people just ... They might [00:21:30] not know what's going on. It's a good way to keep everyone on the same page and let everyone know what you do. David Leary: Yeah, I feel like that's kind of a tie that you're talking about information about running a firm. I saw that the Intuit survey, Billing Rates, is out. It actually wraps up, I think, on the 31st. What's different, though, is I kind of heard rumblings a little bit about how people don't want to do the Billing Rate Survey because of QuickBooks Live. Blake Oliver: Oh, because they feel like they're giving information to Intuit that they'll use to help QuickBooks Live? David Leary: Yeah. So, I poked in to look at [00:22:00] last year's results. I went back, and I looked at the survey results from before. I find it interesting that people would fill this out where it's gonna be this year. Two things that caught my eye. Hourly billing rates went from 88 percent in 2016 to 57 percent in 2018. Blake Oliver: You mean people are using less hourly billing? David Leary: Yes, they're using less hourly billing, and more are using value pricing, which moved from 18 percent to 28 percent. It will be interesting to see if those numbers keep trending that way. Then the real one that I find very [00:22:30] interesting, because this survey before was before QuickBooks Live and people were reporting on how they gained new clients. They said 12 percent are coming in from the Find a ProAdvisor website. It'll be interesting to see if that number decreases now that QuickBooks Live is out because that's a lot of what people think's gonna happen. Like, why are they gonna go find me as a ProAdvisor on the Find a ProAdvisor site if they're just gonna be able to sign up for QuickBooks Live? So that- Blake Oliver: Oh, got it. David Leary: - that's gonna be an interesting number to see if that that changes, as well. Blake Oliver: These are the [00:23:00] numbers from the 2018 survey. David Leary: 2018 survey, yeah. Blake Oliver: When is 2019 coming out? Soon? David Leary: They said that the results will be out early January or mid-January. The survey wraps up at the end of the year, so there's a link in the show notes if people want to do the survey, as well. Blake Oliver: Interesting. Well, hopefully, we'll get some more info on the next survey. I'm really interested to see, like you said, the referrals; if the referrals declined from 12 percent from the Find a ProAdvisor website. David Leary: Yeah, that's gonna be the interesting one; like, what's the real impact of QuickBooks Live? Just the fact that some people are saying they may not wanna take the survey, there's [00:23:30] some impact happening. Blake Oliver: We've talked a lot over the last year about how CAS is growing; outsourced accounting is growing; bookkeeping is growing; controller services are growing. More and more firms are doing the accounting for their clients and doing it on fixed fees. This is big. Something like 30 percent of firms offer it now and another 20 percent plan to do it in the new year. Accounting Today, back in October, surveyed firms to find out how satisfying is CAS? Is it working out for you? The [00:24:00] answer is not everybody has figured it out yet. 15 percent of firms said they were very satisfied; 40 percent said they were satisfied; 29 percent, almost a third, are ambivalent; and a full 16 percent are unsatisfied with how CAS is doing. I thought that was interesting, just to put some context around CAS, and whether or not firms are happy with it, and how it's doing. David Leary: They're unhappy with it. Blake Oliver: Well, half of firms are either- over half of firms are either very satisfied or satisfied; the [00:24:30] rest are ambivalent or unsatisfied. So, it's working out for about half of firms. David Leary: It'd be interesting to have that overlaid on technology use, right? Blake Oliver: Right. David Leary: Because I imagine doing CAS, if you're not- if you don't have a good technology stack, it could be a big nuisance, right? Blake Oliver: Mm-hmm. David Leary: Of course, you're not gonna be happy with it because it doesn't scale well, if you're not building it in a scalable way. Blake Oliver: Yeah. Well, it's important that it becomes satisfying to these firms because nine out of 10 firms, according to the survey, said that it's important to their future, and [00:25:00] nine out of 10 cited improvements in client satisfaction due to CAS; eight out of 10 reported that it provides superior revenue growth, it's attracting new clients, and it's creating new opportunities. The vast majority of firms said these things. They see the potential for it, but they're having- half the firms are really struggling with it. David Leary: I think I teased about Xero becoming a niche app for farmers, so let's chat about that [crosstalk] Blake Oliver: Yeah, I'm interested to hear this because, I mean, [00:25:30] Xero is from New Zealand where, I think, they have more sheep than people, so that kind of makes sense, but explain to me how that affects us here. David Leary: "PaySauce teams with Xero as regulatory pressures build on farmers." This is an article from New Zealand. PaySauce is a payroll app that helps handle special things for farm payrolls. I think Xero also had some partnership with another farming app in Australia. Xero is a partner - we've reported this - is partnered with OnPay, here in [00:26:00] The States, because OnPay Payroll, who's our sponsor, does farm payrolls, as well. I'm seeing a little bit of a trend of Xero really going after this agricultural and farming market, so I'm wondering if it's becoming a niche app for farmers. Blake Oliver: Well, great! because, you know, that'll serve, what, one percent of the population here in the United States that does farming? I mean, this is not a strategy for conquering the United States, that's for sure. Maybe it'll make my relatives happy. My uncle owns a farm. David Leary: Yeah, I'm just saying I'm noticing a trend or a theme here. I've noticed it a lot. We [00:26:30] can jump into- yesterday news came out about the Zygna breach. Are you familiar with the Zygna? Blake Oliver: I think it's Zynga. David Leary: Oh, Zynga. Zynga. Are you familiar with that company? Blake Oliver: Yeah. They make all the Facebook games. I think they were worth a ton of money at one point, and then everybody realized that that wasn't gonna last. David Leary: Yeah, and usually I think what they did is every time somebody built a game that got hot for iPhones and iPads, et cetera, they would come in and buy them. If people [00:27:00] would be using Words with Friends, it becomes really hot, they'd buy that. Then there was that- wasn't there a Pictionary game or something, you could draw [crosstalk] Blake Oliver: I don't know. Like everybody else, I played those games for a little while and then I got tired of them and I stopped. David Leary: Well, they got breached yesterday. If you played them, like you said, once or twice, your email and password that you used for that app has been exposed; that's now out there on the market because everybody probably played one of these games once- Blake Oliver: Mm-hmm. David Leary: -and people are lazy. They use the same email; they [00:27:30] used the same passwords. So, you, as a firm owner, could go to a site like Firefox Monitor, and you could put in your client's email address that they're using to log into their accounting system with, and you could provide a value to them, and let them know that, "Hey, we probably need to change your passwords because your name has been breached, or your email and password have been breached." Not only will it show it for that breach, it'll show it for all their breaches. Blake Oliver: Oh, God ... I just went to this site, Monitor.firefox.com. I've never used it before, and I put in my own email address, and I've been involved in 13 known data breaches. [00:28:00] David Leary: I think I'm in 16. I'm beating you. Blake Oliver: Wow! David Leary: Did I just scare you now? Blake Oliver: Well, no. I mean, because I use a password manager, so even if my passwords were released, like, it's only for that app, it's not for everything else. This is what firm owners really need to watch out for with their clients. Their clients probably aren't using password managers and so are using the same password for, like you said, Words with Friends, and Xero, or QBO, or worse, one of these payment services, or the payroll app ... So, [00:28:30] it's really important to teach them - use a password manager; don't use the same password on these sites that you do for your financials, especially your bank account; and really educate them and keep them safe. David Leary: Yeah, and this lets you tiptoe into advisory services, right? You're advising them on something that's kind of important because this ripples. Blake Oliver: Yeah, this is cybersecurity advisory, and you could actually even put that on your website, that, "As part of signing up for working with my firm for your tax returns, we also keep you apprised of [00:29:00] cybersecurity breaches and whatnot; tell you best practices." David Leary: Because this is how people get into ... I think if you saw recent news, some of those Ring Doorbell things that have been happening. Blake Oliver: Oh, yeah, yeah. David Leary: Have you seen this? Blake Oliver: Yeah. People are hacking into Ring Doorbells. They're not doing anything sophisticated, they're just stealing people's passwords and logging in as the administrator. David Leary: Exactly, because they're basically getting the Zynga breach, right? Like you just said, you've been breached in 13 occasions. Blake Oliver: Right. David Leary: They're gonna take your email address and your password, and they're gonna try it on Ring Doorbell, they're gonna try it on another site and another site and, eventually, they're gonna get in somewhere because people keep using [crosstalk] the same passwords. All these smart Internet of Things appliances they're putting in their house, people are taking control of because they don't have a good password, or they're using a password that they used to play Words with Friends. The takeaway is provide this as a service. This is pretty big story because I think every single person has played one of these games once or twice; even you have. Blake Oliver: I love playing- well, we kinda stopped, but I used to play Words with Friends with my mom. David Leary: I've played Words with Friends with accountants and bookkeepers, so I know for a fact there's accountants and bookkeepers that are in this breach. I guarantee you. Blake Oliver: To close out this episode, [00:30:00] I wanna talk about this article that I spotted in The Wall Street Journal. The title is "Shh! Companies Are Fixing Accounting Errors Quietly." It features an opening about Papa John's, the pizza company. Papa John's International, this spring, discovered an accounting error that had caused years of misstated financial numbers. They, however, decided the mistake wasn't serious [00:30:30] enough to require it to reissue its financial statements, and the SEC wrote a letter asking why because a bunch of important numbers were off by more than five percent, which is, I guess, a rule of thumb for requiring the most serious type of financial restatement. The company replied back saying - oh, and by the way, we know all this correspondence because this is all public on the SECs website - the company responded back that it uses five percent as a "First step," but then applies its own 10 percent measure to decide if such a restatement is warranted. I was [00:31:00] reading this ... These are the first two paragraphs of this article. I'm thinking, this is insane. I know that materiality can vary, and we need to use our judgment to determine what is material, but even five percent is a lot, to me, and I feel like an investor would care about that. 10 percent? That's insane. Imagine if net income was 10-percent off; that would totally change everything. David Leary: Well then, if something was off 10 percent, then you're just like, "Yeah, let's just use our new rule of 15 percent instead now." Blake Oliver: Right. Right. This is not just Papa John's. That's [00:31:30] just an example of a trend which from 2005 to 2018 - this is from a company called Audit Analytics, a research firm - the number of financial restatements by public companies has dropped dramatically. It fell from a peak of 973 in 2005. That's the big "R," restatements; 973 in 2005. It was only 119 last year. So, 973 down [00:32:00] to 119, and the number of- the percentage of big "R" restatements versus the little "R "revisions, that ratio has changed dramatically, as well. It used to be, over 10 years ago, that most of the restatements were big ones. Now, very, very few of them are big. They're just these little restatements. That's where they update their financial statements without having to alert investors. David Leary: The premise here is there's not less accounting mistakes being made because of, oh, there's this technology [00:32:30] and all this other stuff happening, it's just people are kinda gaming the system a little bit differently. Blake Oliver: Yeah. Well, look, I'm not a public-company accounting guy. I'm not a 'big on GAAP' guy. I've always been in the small-business space, but, to me, this is kind of crazy that we basically are holding these public companies less accountable, and they're making these restatements; they're not notifying investors, and the SEC is not really doing anything about it - doesn't seem to be doing much about it. A lot of the chatter in business news is about [00:33:00] the coming recession. When is that gonna happen? My big concern is that the underlying accounting data is, potentially, a lot of businesses are misstating their financials, which pumps up the stock market, which pumps up the economy and that, you know, there will be a reckoning because it's not like, since 2005, we've gotten better at doing accounting. I don't think so, right? If anything, it's gotten more complicated, so we should still be having restatements, but [00:33:30] we're not having them, so it just points to a lack of enforcement. David Leary: I wonder what this ... Because this graph only starts with 2005. I wonder what it was for the last 50 years? Is this a complete outlier, like, this should be a hair-on-fire problem? Blake Oliver: Before 2005, there wasn't a requirement to alert investors. The requirement to alert investors about accounting errors grew out of the financial blowups of the early 2000s - Enron and WorldCom. David Leary: That's right. Blake Oliver: I didn't do the best job of explaining this, but just to go back, [00:34:00] basically, starting after Enron/WorldCom, we had this requirement that you now have to alert investors of restatements. That's where we got the big "R" restatements, the little "R" revisions. In 2005, two-thirds of these restatements were the big ones where you had to alert investors. Now, we've gotten to a point where it's shrunk dramatically and only a very small percentage are actually big "R" restatements, [00:34:30] where we're alerting investors. It's really up to management's discretion as to whether or not they're gonna do that, and it's up to the SEC to challenge management. So, it seems like the SEC hasn't really been challenging, so these restatements and financial alerts to investors haven't happened. A good reason why is that when companies do restate and do alert investors, the stock price gets punished. David Leary: Yeah, because I think that's happening to Under Armour Clothing right now. Blake Oliver: Yeah. Right. David Leary: They had a crazy- the way they were reporting sales [00:35:00] to look better, year after year after year after year, and it finally caught up to them. Blake Oliver: Exactly. So, management's gonna do everything it can to not make a big restatement, and that means that they're gonna put pressure on their auditors to not require it. So, the auditors, because they're getting paid by management, they'll tend to go along with management. It's just this downward trend, and they just wanna not be the Big Four firm that allowed too many of these to go under the rug. It's sort of like, don't stand out, right? [00:35:30] David Leary: Yeah. Everything about this, the math is not acceptable ranges, right? Because how many public companies are there? Blake Oliver: I don't know. David Leary: Thousands upon thousands upon thousands, right? Blake Oliver: Right. David Leary: It used to be a thousand would have some accounting errors and now only 100 have accounting errors- Blake Oliver: Right. Right. Exactly. David Leary: -that are reported? Blake Oliver: Right. David Leary: I'm surprised this is not on fire more; like, there's not more attention to this. For all the talk- everybody's paying attention to Bill.com. This is what they should be paying attention to. Blake Oliver: Well, and this is how issues creep up and become big problems is that it just slowly happens. That [00:36:00] was my cheery - I don't know how you describe that ... That was my cheery way to end the episode, but we'll have more positive stories, I think, next episode, when we talk about our predictions and what's gonna happen- David Leary: You gotta figure out how to do the big short play on this. You need to figure out how do you come out with making $50 million when this all falls apart? Blake Oliver: Yeah, I don't think I'm smart enough for that [crosstalk] David Leary: You discovered this accounting flaw, Blake. Blake Oliver: You know, again, I'm just an amateur at this, so I could be completely off. If you're a listener and you [00:36:30] think that, "No, he doesn't know what he's talking about," let us know. I'm on Twitter. I'm @BlakeTOliver. How about you, David? David Leary: I'm on Twitter, as well: @DavidLeary. Blake Oliver: We'll look forward to connecting with you and, David, I'll talk to you next week. David Leary: Next week. Blake Oliver: Bye David Leary: Bye.