Many firms get their initial motivation to consider electronic client files because client file storage is a problem, and our firm was no different. But we've discovered that there are other benefits we hadn't expected when the firm has online access to client files: No one has to go find a client file when they are on the phone with a client, or want to review the client's information.

 

Background
My firm is small, with two partners and five staff. The implementation of electronic client files has been an evolution; we have been changing and improving the documentation process as we go. We changed from paper to electronic client files at the end of 2000. At that time, we also decided that the way to build our client files electronically was to create them electronically going forward, rather than trying to scan all prior year files. We transitioned gradually into electronic client files, beginning with just our tax practice. As we progressed into 2001, we expanded our electronic files to our financial-statement preparation processes. In 2002, we added most of our remaining files, and refined some of our systems to take advantage of new software technologies to collect client information.

 

Hardware and Software
The process of creating electronic client files is more than scanning in all of the paper documents from client files. We found that there really are three different processes at work in creating a "less paper office": 

No matter which of these processes a firm chooses to automate, some common items of hardware and software are needed. First, an exceptional system of file backup is needed. Every one of us has lost an important file through a computer crash, and recovering from that kind of loss can be a problem. By comparison, losing all your client files at one time might well be rated a tragedy, and in the worst case might even mean losing your business. Backups should be extensively rotated both on and off site and should be tested by periodic restores of backed-up information on another computer. Our firm backs up all its client data each night on tape. That tape is automatically compared to the source after the backup process each night to ensure that what is on the tape is exactly the same as what is on our computers -- this verification process is crucial.

 

Additionally, we rotate different tapes in a specific sequence. We have four different tapes for Monday through Thursday. We have two tapes for Friday and use the older of the two each Friday. The Friday tape is rotated off site each week. Also, we have two tapes for month-end and use the older of the two each month-end. And we have a different tape for each year-end. In the event of a hurricane warning, we send a backup tape out of state to the Midwest. The file server, network switch or hub, Internet router, telephone or cable data lines and each work station also should be protected by surge protectors and battery backups.

 

In addition to tape backup, other hardware and software needed are CD-RW (read/write) drives to create CD-ROMs, document scanners and document-management software. We originally chose a document scanner with a sheet feeder that could accommodate legal-sized documents. It came with various software packages, included an Optical Character Recognition (OCR) package that we have occasionally used. Two years later, we added a second scanner that cost half as much and scans documents about twice as fast. But, as I will explain later, we try very hard not to use the scanners as our source for creating client documents.

 

Document-management software comes in a variety of different prices and complexities. We store client information that we scan, as well as firm-created documents, as PDF (Portable Document Format) files. We chose not to use a document-management software package to organize our electronic client files; instead, we lay out client folders on a networked hard drive by a hierarchy of entity type, partner, year and client.

 

Within each client folder, we keep client-generated source documents separately from firm-generated documents. A typical individual client tax folder has a file with images of all the client source documents (scanned in to the file in a particular order), PDF files of any firm-generated work papers and checklists, and a PDF file of the firm and client copies of the tax return. We use Windows Explorer as our navigation tool to find and open client folders and files. It is not elegant, but it is also not a complex system to use and works well for us. Staff members can find and store client and firm documents easily. This system was not expensive to implement and costs less than $2,000 for all the hardware and software used in the document-management process.

 

Larger firms would benefit from a document-management software program to organize the filing process and index documents so that they are searchable. While more costly and complex, document-management software enables files to be organized in a manner similar to a firm's present paper client files. Client files can be linked by an index that would let a user see thumbnails of each client image or document. Each file can have a short summary of what is in it. Content within the documents can be indexed and searchable. Most of the better document-management programs will show thumbnails of images, PDF, word processing and spreadsheet files, and this would take the place of Windows Explorer in our implementation. Often the files are accessed through a Web browser such as Internet Explorer or Netscape Navigator. Many document-management software programs also can read documents in their native form, so that file copies in PDF format do not have to be created, thereby saving time and, in some cases, storage space. Many programs also have the added benefit of file compression, so the files take up less space on the network's disk drive. At the FICPA's 17th Annual Accounting Show(r) in Fort Lauderdale last September, there were four or five different vendors showing document-management programs, ranging in function from very simple to comprehensive.

 

Storing Client Documents Electronically
I believe the most time-consuming process in a tax practice is documenting the client's information for our client files, particularly in individual tax files. Storing client documents electronically is the hardest of the three processes to implement. But gains in firm efficiency by using electronic client files without scanning are possible by changing the processes of receiving client documentation. Our firm's goal is to receive most client information in an electronic format without having to scan it. For business returns this is fairly easy, as most accounting programs will save data in reports to a variety of file types. These reports can be e-mailed to the accountant or saved on disk. Most trial-balance programs will also import these source documents to eliminate some data entry. Receiving the source documents in electronic form eliminates having to scan them.

 

When individual tax clients fill out paper tax organizers, it makes tax-return data entry easier. While copies of W-2s and other client documents still are required, the organizer can become one of the main source documents in an individual's client tax file. Many tax software providers now make electronic Internet client organizers. The advantage to the practitioner of an electronic organizer over a paper client organizer is that the source document is already in an electronic form, so it doesn't take time to scan. The advantage to a client is that the organizer can be interactive. Depending on how the client answers the questionnaire, different input areas open up for the client to fill in his or her information. For an overview of an online tax organizer process, visit http://www.prosystemfx.com/products/productivity/tax-notebook.asp and click on the Flash Demo icon.

 

Storing Internal Firm Documents Electronically
One way of creating electronic file copies of internal firm documents is to make PDF files out of the documents. PDF files are created by using a PDF print driver program, and printing the file to disk. Many tax software programs have options to create PDF files without special software. The files then can be read by anyone, regardless of whether or not he or she has the program that created them. Free PDF file-reader software is available on the Internet for just about every computer and operating system.

 

Storing Firm Work Products Electronically
The process of creating firm work products such as tax returns and financial statements in electronic form uses the same technology as the process of making internal firm documents electronic. Letterhead for financial statements can be set up to print the same way as it would for a computer fax program. Color in documents is supported for viewing and printing. Our firm generally provides client tax return and financial statement copies on CD-ROM. Clients find that printing copies of tax returns or financial statements from their CD-ROM is easier than copying them on their copier, and they also come out sharper. Such copies also can easily be sent by e-mail to banks and other third-party creditors.

 

There are two important security features to remember if you give work products to clients in PDF files. You should protect any PDF file you create so that it cannot be altered without your password. Additionally, you may wish to have the client specify a separate password necessary to view or print the file.

 

Making the transition to electronic files has been an evolution that has allowed our firm to become more productive. Although the process can be time-consuming at first, the benefits will come later. Start small, and soon your firm will be on its way in becoming a "less paper" office.

 

JOHN REED, CPA, is a member of Reed Blackwood & Co., LLC, in Fort Myers,and a shareholder in Accounting Software Associates in Fort Myers. Reed serves on the FICPA Editorial and Construction Industry Conference committees.