Bookkeeper? CPA? Both?

Two people at desk

Not all accountants do taxes; this accountant doesn't even do her own taxes! Yet most folks lump all of us accountant-types into that one category - taxes. But the strengths and contexts from which bookkeepers and CPAs draw differ significantly. Let me explain.

The context from which most CPAs operate is that of aiding clients to minimize, within tax guidelines, the amount of taxes paid. That's exactly as it should be and exactly what I expect from my own CPA. But this context doesn't necessarily work for day to day financial reports on which business decisions are made. I'll illustrate with a real world example, names and specifics having been changed to protect the innocent.

Company FGH, Inc. researches a specific method of curing cancer. During the research scientists discover a compound that, while not the cure they are looking for, is highly effective in treating age spots. Eureka! An LLC, wholly owned by FGH but which has its own investors, is established and licensed to make and sell the compound. Profits from that LLC goes back to FGH to further its research. It's set up to be win-win!

Let's now look more closely at the transactions surrounding the licensing. LLC will pay FGH a licensing fee for the privilege of bottling and selling the wonder compound to the public. If FGH and LLC were not related, it's easy to see that FGH has income from licensing and LLC has expense for the same thing. However, the CPA handling the routine bookwork and coming from the context of tax reporting, does not record the income for FGH or the expense for LLC. After all, at tax time, the FGH income and the LLC expense cancel each other out.

But by not recording the income and expense, the financial statements then presented to the LLC investors show a net income much higher than it should be. When investors see good net income on a statement and yet no actual monetary return, many questions are raised! Where did the money go?? In this case, the investors convinced themselves that the FGH management was skimming income.

This point is where I came into the story. I discovered the omission of the critical transaction, and restated years of financial statements. Unfortunately, by then the investors' distrust of management had grown to such an extent that there was no going back. Much angst, and many bookkeeping and attorney fees later, the investors succeeded only in causing the closure of both businesses.

An experienced managerial bookkeeper would have properly used intercompany accounts (that's a whole other blog!) to properly record the transactions and present accurate financial statements.

Bottom line, you need an experienced bookkeeper as much as you need a CPA. The experienced bookkeeper will prepare financial reports on which sound business decisions can be based. The good CPA will then take those reports, prepare your tax returns, and help minimize your tax bill.

Have both professionals on your team, and take advantage of the expertise of each. You won't be sorry.

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