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It’s a fact that most agency owners didn’t particularly like accounting classes – if they’d even taken accounting classes in college – or they’d probably be accountants rather than agency owners. ‘insurance.

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

The problem is compounded by agency management systems and the shortcomings of those systems. Starting with QuickBooks, in the hands of 99.99% of agency owners, it is completely incapable of correctly accounting for premiums, especially agency invoice premiums. A number of smaller agency management systems also cannot properly handle agency invoice accounting, even though these systems are designed specifically for insurance agencies.

Even large systems have problems because, in my experience working with very large and very small agencies across the United States and Canada, the initial training is almost always grossly inadequate. As a simple example, the trainers do not explain at all, or at least insufficiently, the importance of choosing accounting parameters that correspond to the way in which the agency will actually process its bonuses and commissions.

This is one of the reasons why a common descriptor of these systems voiced by agency owners is “hate”, as in “I hate the ABC system with a passion, and I will never buy their system again. if it is to my own detriment”. The passion with which so many people hate these systems sometimes amazes me. These emotions have opened the door to new systems, but even these new systems generally do not correctly formulate accounting and/or financial statements and/or operational data. I really feel for agency owners, especially small agency owners, who are caught in this situation.

Agency accountants generally do not know what they are looking at when they see the resulting financial statements. One of the biggest problems comes when an agency is trying to get a loan or sell. Their accountants are too lazy, ignorant or jaded. I had an accountant tell me recently that it doesn’t matter if the balance sheet is correct because the sale is an inside sale. The problem with its ignorant stance is that if an agency is no longer trusted, in most cases the seller has no title to expirations under their contracts with the carriers. Does the accountant advocate selling assets that the seller does not own?

This particular accountant—and others have told me this as well—said it didn’t matter because no one will ever know. Besides the fact that the agency value, the price paid by the buyer, should have been significantly reduced, would anyone say that it doesn’t matter that the person selling you stolen jewelry doesn’t own it and is paying for it all the same ?

A balance sheet and an income statement are activity bulletins. This is how we know the score. If for no other reason, an accurate score should be kept. I feel sorry for agencies that have accountants who don’t take the time to do their job properly.

Almost all accountants tell me, “I only do taxes and these problems don’t affect the tax returns. They are right. Agency owners should explicitly ask their accountant for additional advice and services rather than assuming the accountant will provide them without being asked. However, when asked, the accountant should provide high quality advice rather than ignoring that just because accounting is for internal purposes no matter how accurate it is. Fire those accountants.

An additional complexity is ASC 606. It actually applies to agencies. I have spoken to many accountants who do not provide advice or recommendations to their agency’s clients. They just don’t want to deal with it.

For people who don’t particularly like accounting, dealing with software that doesn’t meet their specific needs, and accountants who are a black hole in relation to their accounting needs, is a pain. Many agency owners agree simply because they just don’t want to deal with it.

I see it all the time when I do agency reviews. The problem arises 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 verified statements. It is then too late.

Agency owners have limited options regarding their agency management systems. When choosing an agency management system, make sure you understand what the capabilities of the system are. When the seller says that the accounting system is a complete system, verify with proof that he correctly handles the accounting of agency invoices, for example.

If the system cannot perform agency invoice accounting properly, but you still want this system, you should create a solution, because proper balance sheet accounting can only be ignored at your own risk.

Changing accountants is easier. Insurance agency accounting is much more complex than normal small business accounting and few accountants have appropriate experience in this area. What you are looking for in an accountant is someone who can be trained in the unique requirements of independent agency accounting. I have trained a number of CPAs on agency accounting. If they are trainable, not too selfish, and smart enough, training is quick and easy. Very good CPAs figure it out in about 45 minutes, usually.

Also, you should explain to the accountant that you want good accounting for business purposes, not just advice on how to reduce your taxes. Running a business to minimize taxes rather than to start a business is not a good strategic move. However, many accountants simply conclude, without even asking their clients, that reducing taxes is a client’s only goal. Make it clear that this is not your only goal.

Small agencies have the most difficult situations. I really feel for you all. With limited resources, hiring a high-quality CPA is probably even more important because a high-quality CPA, if they learn agency accounting, can help fill in some of the gaps in limited agency management systems.

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