Agency Accounting

It is a fact that most agency owners did not especially like accounting classes — if they even took accounting classes in college — or they probably would be accountants rather than insurance agency owners.

Unfortunately, independent insurance agency accounting is far more complex than most small business accounting. Agency owners do not know and almost 100% of their accountants do not know this truth, with the result that most independent insurance agencies’ accounting books are materially inadequate.

The problem is compounded by agency management systems and these systems’ inadequacies. Starting with QuickBooks, in the hands of 99.99% of agency owners, it is entirely incapable to correctly account for premiums, especially agency bill premiums. A number of the smaller agency management systems cannot process agency bill accounting correctly either, even though these systems are designed specifically for insurance agencies.

Even the large systems have issues because, in my experience working with very large to very small agencies across the United States and Canada, the initial training is almost always significantly inadequate. As one simple example, the trainers do not explain at all, or at least inadequately, the importance of choosing accounting settings that match how the agency is actually going to process their premiums and commissions.

This is one reason that a common descriptive of these systems vocalized by agency owners is “hate,” as in, “I hate ABC system with a passion, and I’ll never buy their system again even if it’s to my own detriment.” The passion with which so many people hate these systems astonishes me at times. These emotions have opened the door for new systems but even these new systems are generally not formulating the accounting and/or financial statements and/or operational data correctly. I really feel for agency owners, especially small agency owners, who are caught in this situation.

The agencies’ accountants typically do not know what they are reviewing when they see the resulting financials. One of the biggest problems occurs when an agency tries to get a loan or sell. Their accountants are too lazy, ignorant, or blase. I had an accountant tell me recently that it does not matter whether the balance sheet is correct because the sale is an internal sale. The problem with his ignorant position is that if an agency is out of trust, in most circumstances the seller has no title to the expirations per their carrier contracts. Is the accountant advocating selling assets the seller does not own?

That particular accountant — and I have heard this from others, too — said that it does not matter because no one will ever know. Besides the fact that the agency’s value, the price paid by the buyer, should have been significantly reduced, would anyone say that it does not matter that the person selling you stolen jewelry does not own it and then pay them anyway?

A balance sheet and an income statement are business report cards. This is how one knows the score. If for no other reason, an accurate score should be kept. I feel for agencies that have accountants who do not take the time to do their jobs correctly.

Almost all accountants tell me, “I only do the taxes and these issues don’t affect the tax returns.” They have a point. Agency owners do need to explicitly ask their accountant for additional advice and services rather than assume the accountant will provide them unasked. However, when asked, the accountant should provide high quality advice rather than be dismissive that simply because the accounting is for internal purposes, it does not matter if it is all that accurate. Fire those accountants.

An added complexity is ASC 606. It actually does apply to agencies. I have spoken to many accountants who are not providing any advice or recommendations to their agency clients. They simply do not want to deal with it.

For people who do not especially like accounting, having to deal with software that does not work for their specific needs and accountants that are a black hole relative to their accounting needs, is painful. Many agency owners just go along because they simply do not want to deal with it.

I see this all the time when I do agency valuations. The problem occurs when the agency cannot get a loan, or cannot be sold, or will be sold at a discount, or the agency may even need to pay for audited statements. It is too late then.

Agency owners have limited options regarding their agency management systems. When choosing an agency management system, be sure to truly understand what the system’s capabilities are. When the salesperson says the accounting system is a full system, verify with proof that it actually does agency bill accounting correctly, as one example.

If the system cannot do agency bill accounting correctly, but you still want that system, you must build some solution because proper balance sheet accounting can only be ignored at your eventual peril.

Changing accountants is easier. Insurance agency accounting is far more complex than normal small business accounting and few accountants have any proper experience doing it. What you are looking for in an accountant is someone who is trainable in the unique requirements of independent agency accounting. I have trained a number of CPAs on agency accounting. If they are trainable, not too egotistical, and smart enough, the training is fast and easy. The really good CPAs figure it out in about 45 minutes, usually.

Also, you must explain to the accountant that you want good accounting for business purposes, not advice solely on how to reduce your taxes. Running a business to minimize taxes rather than to build a business is not a strategically good decision. However, so many accountants just conclude, without even asking their clients, that minimizing taxes is a client’s only goal. Make it clear this is not your only goal.

Small agencies have the toughest situations. I really feel for all of you. With limited resources, hiring a high-quality CPA is probably even more important because a high-quality CPA, if they will learn agency accounting, can help make up for some of the shortcomings of limited agency management systems.