The paperless office.

If your client or employer is like most organizations, its filing cabinets are loaded to capacity and tucked into every corner of expensive office space, with the overflow carted off to inconvenient off-premises storage facilities. As a result, it can take hours, if not days, to track down some documents.

For most offices, the problem is getting worse, with average paper volume growing 25% annually. The cost can be staggering--and it's not just the cost of storage. For example, filing or retrieving a single document can cost as much as $20 in labor. Finding a misfiled document costs an average of $125 in labor. Recreating a lost document (it's estimated that 7.5% of all paper documents get lost) costs an average of $350 in labor.

Document management systems may be the answer. Although they may require a considerable investment in computer technology initially, they can reduce these costs in the long term and make your client's or employer's operations more efficient and effective.

In addition to eliminating filing cabinets of documents, document management systems have these benefits:

* Once an image is stored in such a system, many people can access it immediately and simultaneously, even from remote locations. For example, an old tax return can be retrieved in minutes, rather than hours or days (as would be the case if it was stored off-site). Further, documents can be sent electronically to other computers via modem.

* If a document is converted by optical character recognition (OCR) software, it's possible to locate even misfiled material simply by conducting a computer search for key words in the document.

* By adding a password to certain files, users can keep certain information confidential--without the need for other kinds of physical security.

The document imaging field still is in its infancy. While there are several software packages for converting, indexing, storing and retrieving documents, none of the off-the-shelf systems is flexible enough to meet most users' needs. As a result, systems must be customized for the user's unique operation.

Choosing and integrating system components put a heavy burden on users: How, after all, can they select the correct components without first understanding both their organizations' needs and the components? The purpose of this article is to help readers get started. (For more information on how one company applied this technology successfully, see "Setting up a Paperless Office," page 77.)

BY ANY OTHER NAME

The technology used to address the problem goes by several names. The most popular is document imaging. Descriptive names less often used, but worth knowing because consultants and trade literature sometimes use them, are image management and document management systems. Basically, they're all the same thing--automated systems for scanning, storing, retrieving and managing paper documents.

The technology involves the use of a scanner, which electronically converts an image on a page into tiny light and dark dots that are then encoded into bits of binary information--in the same format computers use to store data. (The conversion process is similar to what a fax machine does before transmitting a document over telephone lines.) The original can be a handwritten or typed document, a photograph, a drawing, a flowchart, a computer printout, an invoice, a tax return, an X-ray, even a fingerprint. The converted image then is stored, either on a computer's hard disk or, more likely because of the huge amount of disk space required, on optical disks--the computer data-storage equivalent of CD-ROMs.

If the document contains typed text or numbers, the data can be processed one step further by OCR software--making the data much easier to handle. OCR software converts the images of the letters and numbers directly into a word-processorcompatible language, allowing the user to create multiple search indexes for each document--a major advantage that will be explained later in this article--and to edit or reformat the document with word processing software. Once converted by OCR software, the data can be compressed to take less storage room. (For an overview of how such a system works, see the exhibit at left.)

[CHART OMITTED]

HARDWARE REQUIREMENTS

A typical document imaging system comprises hardware components for input, storage and retrieval. In addition, software is needed to manage the indexing and retrieval of the stored documents. The total cost of a relatively simple system is between $5,000 and $50,000. Let's examine each of the three hardware components.

Input. A scanner is required to capture images electronically. Scanners should be able to capture images at several resolutions--typically from 200 to 400 dots per inch (dpi). Scanner speeds (which range from 4 to 40 pages per minute) depend on several factors; the most important is the resolution: Operating at 200 dpi is much faster than at 400 dpi. Also, having an automatic document feeder and an imaging accelerator board (an electronic component that is not standard in most computers) also enhances speed. If canceled checks or other two-sided documents must be converted, consider purchasing a scanner that has a duplex scanning feature. Most scanners handle documents up to 8 1/2 by 14 inches.

Storage. A single scanned page requires between 20 and 100 kilobytes (Kb) of space, depending on the resolution and image compression. Optical disks store the most data: A 5.25-inch optical disk can hold up to 650 megabytes (Mb)--the equivalent of over 13,000 pages. Optical disks with double that capacity are becoming standard. A special multifunction disk drive costing about $3,000 is needed to write to an optical disk. With a rewriteable magneto-optical disk, data can be recorded on the disk, erased and then replaced with new data; such disks cost about $150 each. Another type, called a write-once-read-many (WORM) disk, may be more appropriate for CPA firms because the data on such disks can't be changed, offering useful archival and control features. It's also possible to record on CD-ROMs, which are cheaper than optical disks. The recording equipment costs less than $5,000.

When data storage needs are very large, a jukebox should be considered. Such devices work like a traditional jukebox, storing many optical disks that can be called up one at a time as needed.

Retrieval. The final component is the one that gives most users the biggest problem. To retrieve a document, the user has to know where to look. That's where the software for indexing comes into play. (The intended use for the converted documents and the desired way to gain access to them affect the choice of which indexing, or retrieval, software package to use; these factors also may affect the choice of imaging system components.)

Documents are retrieved according to the way they were filed (indexed) during the conversion process. The document imaging industry uses a standard for filing, and it's the equivalent of most office filing systems: Documents are stored in "file cabinets," which are made up of "file drawers," which in turn consist of "file sections" broken down into "file folders" with file names, numbers or both--allowing four levels of filing. This type of filing is called flat filing.

There are other indexing systems, too. If a document is converted with OCR software, any OCR-readable data in it can be used as the basis for the index--for example, client number, date, client name or any unique word. This type of filing is called relational filing. Although it is more flexible and powerful than flat filing, it's more difficult to use because it has more features than flat filing. Accountants considering imaging systems for storing and retrieving only tax returns and workpapers might be satisfied with a flat filing system--at least in the beginning--because it can index a tax return by the client's name and the year of the return (for example, "M-Weiss.94" would identify my tax return).

Hardware options. Many users purchase high-resolution 17- or 20-inch monitors for their imaging systems. Such a large viewing area makes a big difference in terms of eye comfort, especially when a large number of documents must be looked at. With a large screen, not only can the user see more, but the letters and numbers of a document also are bigger.

The user's laser printer must have enough memory to print full-page images. At least 2 Mb of memory is needed; 4 Mb is even better. Adding a printer accelerator card will increase the printing speed dramatically.

WHAT DOCUMENTS TO CONVERT

These documents are ideal candidates for optical storage in a CPA's office:

* File copies of income tax returns.

* Time and billing reports.

* Payroll records.

* Bank statements.

* Canceled checks.

* Accounts receivable and payable confirmation requests and replies.

* Detailed physical inventory count sheets.

OPPORTUNITIES FOR CPA FIRMS

Document imaging offers accounting firms more than just internal cost savings and increased productivity. Once a firm has experience with its own system, it can market the service to clients. The substitution of document images for original paper documents also will require that they have their document-handling policies audited regularly. In addition, document imaging allows accounting firms, when permitted by state ethics rules, to offer document conversion services as a service bureau.

As with any emerging technology, those who quickly become experienced in imaging applications stand to benefit the most.

EXECUTIVE SUMMARY

* DOCUMENT MANAGEMENT systems scan and store documents electronically, eliminating the need for paper documents.

* ANY IMAGE CAN BE stored--whether it's a handwritten or typed document, a photograph, a drawing, a flowchart, a computer printout, an invoice, a tax return, an X-ray, even a fingerprint.

* SCANNED DOCUMENTS ARE easier to store, reduce the need for rows of filing cabinets and make it easier to find documents. Such documents also can be sent via modem or over a network to other computers.

* DOCUMENTS CONSISTING MOSTLY of text and numbers can be converted into a word processing format with optical character reading software. Once converted, such documents can be edited easily.

Questions and answers on optical records' legal status

Q Do state laws cover the admission of optically stored records in legal proceedings?

A Yes. Every state has such laws, providing a solid legal foundation for admitting optically stored records in court. Although the specific legal basis differs from state to state, in most states it is found in the Rules of Evidence and in the statutory laws.

Q What other factors are important to the admission of optically stored information?

A There are two that involve the "hearsay rule" and the "best evidence rule." The hearsay issue arises when it is not possible to cross-examine evidence. After all, how do you cross-examine a document? This situation can be overcome by the "business records exception" to the hearsay rule, which recognizes that certain records that have been created and relied on in the regular course of business possess a certain circumstantial probability of trustworthiness and therefore ought to be received in evidence. The best evidence rule says an original should be submitted as evidence unless a satisfactory reason is presented for its unavailability. The option for providing copies of records is addressed in existing federal and state statutes. The specific statutes are the Federal Business Records Act and its state counterpart, the Uniform Photographic Copies of Business and Public Records as Evidence Act (UPA). In essence, they say if a copy is created by a "process which accurately reproduces or forms a durable medium for reproducing the original," the reproduction is as admissible as the original.

Q Have the courts established conditions for admitting optically stored information?

A Yes. Courts that admitted computer data compilations and copies of paper records in particular cases established conditions for accepting such records. They also established standards for the admissibility of microfilmed documents. This information can be found in Legality of Optical Storage (see the sidebar "For more information" on page 76).

Q If business records are stored on an optical disk, may the original paper records be destroyed?

A The UPA says "the original may be destroyed in the regular course of business unless held in a custodial or fiduciary capacity or unless its preservation is required by law."

Q Will government agencies accept optically stored records?

A Because the optical storage of information is a relatively new capability, most government agencies have not yet taken a formal position on its use. But the trend is in favor of acceptance.

Q What should users of optical storage systems be most concerned about?

A While there is a solid legal foundation for admitting optical media in court, that does not guarantee the admissibility of documents produced on all optical systems. A legal proceeding can question a specific system's ability to produce accurate, reliable and trustworthy documents.

Users should establish written policies and procedures for their electronic imaging systems. Further, these systems should be regularly audited.

--Robert F. Williams is president of Cohasset Associates, Inc., a management consulting firm in Chicago.

For more information ...

Periodicals

* Imaging 12 West 21 Street New York, New York 10010 [phone]

* Imaging World IW Publishing, Inc. P.O. Box 1358 Bayview Street at Sharp's Wharf Camden, Maine 04843 [phone]

* Inform Association for Information and Image Management 1100 Wayne Avenue, Suite 1100 Silver Spring, Maryland 20910 [phone]

American Institute of CPAs practice aid

* Image Processing and Optical Character Recognition--How They Work and How to Implement Them To order, call [phone] and ask for product number 043000JA; price: $14.50 (AICPA members); $16.00 (nonmembers).

Book

* Legality of Optical Storage Robert F. Williams Cohasset Associates, Inc. 3806 Lake Point Tower 505 North Lake Shore Drive Chicago, Illinois 60611 [phone] Price: $240.