More bookkeeper nightmares

A few posts ago, I wrote that all bookkeepers stink.  Just yesterday, the following happened.

For this post, I was tempted to not change any of the company’s information. This situation happened really recently, and I am still pissed off about it. However, after a quick consultation with my personal attorney and a handful of anti-depressants, I have decided to stick with my policy of protecting the guilty.


Ed ran a marketing company that had been in business for about three years. Ed’s customers were mostly Fortune 1000 companies for whom he managed large marketing campaigns. Ed was a new client and we were preparing his corporate income tax returns for the first time. Sharon was Ed’s bookkeeper. When we started the tax preparation process, we didn’t know a thing about Sharon, except that she kept the company’s books in QuickBooks.

The normal corporate tax preparation process goes as follows. First we get a copy of the company’s accounting records, in this case a backup of the QuickBooks data. Second, we print out the company’s year end balance sheet and income statement. Next, we then attempt to determine the reliability of the financial data by asking a predictable set of questions and running a bunch of reports. At least we are under the impression that the questions are predictable by anyone with a high school education. The advantage of our having a copy of the actual accounting records is that we can answer a lot of questions about the financial statements ourselves. However, there are a number of areas where we flat out just have to ask the client’s bookkeeper if an account is correct. Last, after we have reliable financial statement amounts, we complete the tax returns. This is where the fun began with Sharon.

For Ed’s company, we printed out a year end listing of accounts receivable from QuickBooks that showed accounts receivable to be $250K. At this point we have a report that shows a listing of customers and balances that adds up to $250K. Now remember our rule that numbers on the balance sheet have to match the real world amounts. Some tax preparers might blindly assume that the listing of customers and balances is the real world amount. Our staff tax preparer was not that lazy. She gave Sharon the listing of accounts receivable balances and asked Sharon if the balances were correct. Sharon replied that they were. At this point, our staff preparer then took the accounts receivable listing and compared it to the amount on the balance sheet. The amounts matched and life seemed to be good. After asking a bunch more questions and getting satisfactory answers, the preparer then completed the corporate tax returns.

Our firm does something that seems to be a bit unusual in the tax preparation world. After we prepare a corporate tax return, we send it to the business owner in draft format. We do this for a couple of reasons. First, we value the input we sometimes (read that as “rarely”) get when a business owner reviews the returns. To put this in less polite terms, we hope to get through the shock stage with the business owner when he / she sees the tax liability. Secondly, and to be honest much more important for us, is that we hate to re-run and reprint tax returns. It is a pain in the ass. So we get the business owner’s sign off on the draft before we finalize the returns. This is where the fun really began with Ed and Sharon.

I sent Ed a draft of the corporate tax returns. A couple days later, he responded and told me that there was something wrong with the revenue amount on the tax returns. I sent him the report from QuickBooks that showed the revenue number that appeared on the tax returns. This number, of course originated with Sharon. Ed and Sharon responded that the revenue amount was low by $100K. You might fairly ask why Ed would want to report more income on a tax return. I should add that the tax return draft was showing a loss of $200K. He was rightly worried about his ability to get financing from a bank with a $200K loss.

Our staff preparer asked the obvious accounting question. If the revenue was low by $100K, what would the adjusting entry look like to record the additional revenue? Accounting junkies understand that if you credit an account, you have to debit another account. In this case, to increase revenue by $100K you credit the revenue account on the profit and loss statement. What do you then debit? I’ll wait for your answer……….. I’m still waiting. Let’s move on.

There are two reasonably likely possibilities for the debit. First, you might debit the bank account. However, if you do that you are increasing the balance in the bank account by $100K. The bank account was reconciled already. That means the balance in the account already matched, before this $100K adjustment, the amount in the real world. Throw out the bank account as a possibility.

Let’s try door number two, which is accounts receivable. Of course, I am setting you up on this one, and a competent bookkeeper would know why this is a setup. We already had an accounts receivable listing, the real world number, which matched the amount on the balance sheet. Not only that, but we specifically asked Sharon if the listing was correct. If we credit revenue and debit accounts receivable by $100K, we are increasing accounts receivable to $350K when our real world accounts receivable listing only shows $250K. In most rational universes, a $100K difference is a material amount. We gently (yes, I really was diplomatic in this case) suggested that Sharon’s new revenue amount was not correct. We were pretty certain we had gotten through their thick skulls, but we were mistaken.

Sharon responded a couple days later that there were some accounts receivable that were not in the financial statements. That may have been the case, but here is the kicker. This is still her mistake. Shouldn’t she have recorded these accounts receivable before giving us the year end information? Most rational, intelligent human beings would think so. All competent small business owners would realize this. Not Ed. We made an adjustment to the tax returns to record the additional revenue and accounts receivable. You might also justifiably be curious if the adjustment just happened to be $100K. Not quite, the adjustment was $95K. I have trouble writing that with a straight face.

We finalized the tax returns and I was certain Sharon had been suitably chastened by the experience of dealing with real accountants. A day after we finalized the tax returns, Ed sent an e-mail message to Sharon, and copied our staff preparer. He congratulated Sharon on finding and correcting our mistakes in the tax returns. I am drinking heavily as I write this and reconsidering using Ed’s real identity. I have to remember I have a wife and children to consider. This is what happens when a real life Homer Simpson runs a business.  This is also why all the good CPA's drink and take drugs.  I am kidding about the drug part - I think....