Episode 46
It’s mini-tax season for me around here with the October 15th deadline close by (I am recording this episode at the beginning of October), so this surely is the season for client situations to share with you. The situation that I will be speaking about today is not only for bookkeepers but for small business owners as well. Before I begin, check out the You Tube channel at youtube.com/@bookkeepermensch, and leave a like and a comment. It really helps me out over there. And in the notes, click on the Substack link to sign up and share the newsletter with any business owner or bookkeeper who you know. And of course, email me and say hi. I promise, I won’t bite. Just a lonely bookkeeper who would love to hear from you. I’m taking the weekend off to re-charge for leading up to the October 15th deadline -- Paul Rosenblum
Let’s talk about bad bookkeeping, owners of a business who didn’t understand that they have to be part of the process (something that I have been preaching here for a long time) and decisions that I have to make to move forward (or maybe backward – I’ll explain) very shortly. And again, let me say that there are lessons here for both bookkeepers and business owners.
I have a situation today that just happened in the last few days that I want to share. I have not yet determined exactly what the next steps are since information is still coming in, but I really want to talk about the gathering information process that I do, and things that I do to take control of the situation.
This is a client who was first recommended to me for a training session about 4 years ago by a small accounting office that does bookkeeping as part of their process. I already knew the owner of this firm from another company that he owned around 2017, so I met him once so, he was an acquaintance. He texted me a few days ago to see if I would work with one of his clients newly hired bookkeeper with a training session. I told him I would. A few years ago, I had a training session with their old bookkeeper, and I remembered that the books were really not in good shape at all. At that time, I stuck to the task of answering a few questions, and didn’t get involved because I had another large ‘fix-it’ project that I was currently working on.
However, this time, even though I am busy, I went in with a possibly different mindset. I had an introductory call with the bookkeeper, and she shared a screen on zoom showing me what her question was. When I heard the question and saw the actual transaction, I immediately knew that this was going to be ‘trouble’. It was a customer invoice which was paid with a manual entry in QuickBooks online, and a deposit was made in the bank account in QuickBooks online, again, with a manual transaction. However, in reality, there not only was no deposit made in the bank, but it was decided that the invoice needed to be lowered because the work was reduced. The customer check was voided and a new check with a lower amount was issued. The second problem was that the deposit in QuickBooks online showed not only the invoice that had to be lowered, but also another invoice that was paid separately and made as a separate deposit at the bank. It was a recently dated transaction, and I asked them if the bank account was reconciled. If it was, it would be tougher to fix but possible. They weren’t sure. So, I looked for myself. There were two bank accounts in the system. One, all the way back in 2017 was never reconciled. I asked them if this account was still opened, and I’d suggested that that the account needed to be reconciled. They told me that the account was closed at the bank. The other bank account was reconciled only through April of 2023. So, I asked them if they minded if I took a look at the operating account to see if there were any unreconciled transactions that were old. When we looked, indeed, they were! Around $130K of transactions that were sitting in the bank register from previous years not reconciled. I looked at the profit and loss and saw personal taxes as an expense of a corporation, which they are not. The more I looked, the more incorrect things that I found. So, we made an appointment for me to spend more time than just a 10-minute introductory call a few days later. During that call, I connected directly to their computer and talked to the bookkeeper and the owner on speakerphone.
I told them what I found, and we should discuss a course of action. I told them that if these books were being used by their accounting firm to prepare the taxes, then it looks like they overpaid taxes by a lot over the years and we could amend some of these tax returns. They told me that they would like the books correct. We went over a number of things, we corrected the deposit that I talked about earlier, and a few other questions, and then I told them that I would like to discuss with their accounting firm what the next steps would be.
It ends up that the accounting firm was doing their own bookkeeping for this company so that the taxes could have been pretty accurate. I also found out that they have all the PDF files of the now closed bank account that was never reconciled in the books of the client. So, this is a lot of work for me but do-able if I were to take this on and go all the way back to 2017 and reconcile the bank accounts and correct balances. I have not yet decided on what the next steps are.
This is why:
Two possibilities here:
- From 2017 to the end of 2023, one mass reconciliation could be done making the balance $0 since the first account that I would work on would be the closed one. Then the unreconciled difference could be put in an Equity account called “Prior years adjustments”. And that’s the end of it. And the same with the current bank account. We would start from the beginning of 2024 since taxes have not been filed yet since they are due in March of 2025.
- Each month of the closed bank account would be reconciled separately until that account was closed sometime in 2023, again showing a $0 balance in that now defunct account. And the same with the current bank account. Then I’d run a profit and loss detail for each month all the way back to 2017 and correct anything that would need to be corrected. When each year is done, I would compare my results to the tax return that the tax preparer created based on their books.
Let me first explain that I always roll my eyes when a new client tells me, or I find out that the accounting firm is doing the bookkeeping for the client. It tells me two things:
- The client either doesn’t have a set of books that they can easily look at themselves
- That the accounting firm really isn’t doing ‘bookkeeping’ -- they are doing what we call “Write-ups” which use every shortcut in the bookkeeping world. For example, they might be making one entry for deposits for each month, just assuming that all deposits are revenue which is income taxable, and they probably won’t have any subaccounts of expenses telling the financial ‘story’ of the company that I have mentioned in prior episodes here.
So, when I hear that the accounting firm is doing the bookkeeping, I always think to myself – how accurate can it really be? Can their books withstand IRS audits? I don’t know for sure, but I do tend to assume that they won’t, especially expenses. So, when you look at the whole picture of the situation, my first thought is to do the entire bookkeeping over again and then compare to the already filed tax returns.
Of course, the answer doesn’t belong to me-it belongs to the owner of the company. There are time considerations, financial considerations, and logistical considerations. In this case, I’m thinking about suggesting to the client that I re-do their books using the desktop edition, through 2024 in a cash basis, and then fixing the opening balance as of 1/1/2025 in their QBO database and training them and continuing from there including entering customer invoices and payments correctly. So, lots of possible avenues to travel here.
It begs the question, though – how does a business have years of books done by a ‘supposed’ bookkeeper and not know that they aren’t accurate books for more than 6 years? Are they running their business without ever looking at their books? I have spoken about this before, but I’ll say it again: Business have to be nurtured, and it’s the owner’s responsibility to keep track of their own businesses and make sure that things are being done properly, from accurate bookkeeping to the filing of tax returns. If the accounting firm is doing internal bookkeeping or ‘write-ups’, then the client can’t really keep track of what they are doing. They can’t make sound decisions about their company. They can’t plan for the future growth of the company. And they probably can’t get approved for loans very easily, if at all. It all starts with interviewing bookkeepers and tax preparers. The client has to know exactly the services that they are paying for, and also, in terms of the bookkeeper, how good they are. The best way for the client to find out is having the bookkeeper allow the client to talk to a couple of the bookkeeper’s clients directly. Otherwise, you might be going into hiring an independent bookkeeper blind.
Ohhhh—the things I see at certain times of the year. It shouldn’t surprise me, but it does. Every single time.
It’s a perfect example of hiring someone who ‘says’ that they are a bookkeeper, but without any training or understanding of what real bookkeeping is. I will now fall into my digression paragraph here -- this is my love/hate relationship with Intuit- the company that makes QuickBooks. When the software first came out in 1994, the main advertising campaign was— “Look how easy it is. You’ll be up and running in 10 minutes”. They made it sound like anyone who was good with numbers would be able to do the bookkeeping for small businesses. And that’s just not true. I hope all of these episodes of this podcast has made that point. It’s not easy. Yes, Intuit helped give me a teaching career and a bookkeeping practice, but at what cost? They brought people into the bookkeeping field who should never have been ‘close’ to the profession. They convinced business owners that their secretaries (remember I’m talking 1994) and administrative assistants could do bookkeeping easily. Wrong, wrong, and wrong. But ok-I’ll stop my mini rant now.
This is why these kinds of situations that I have been talking about today happen.
I’ll let you know how this story concludes and what the final decision by the owner when it happens.
Actually, this is the kind of client that I would like to have going into my “semi-retirement” one day. A project with a beginning and an end, training a bookkeeper on how to do things the right way, and then walking away and starting another project. I would cut way down on the monthly bookkeeping responsibilities and take on shorter term projects.
Let me know if you would like to hear about more situations like this – I have more, especially this time of year!
I hope you had a good Halloween— bookkeeping can be a scary thing too, sometimes!
I’m (putting on my scary mask and going to the office) -- Paul Rosenblum
