[Anonymous]

Curious, as current and future accounting professionals, what would you do if you were on an audit (or if you worked for a private company) and saw the client/owner paying someone cash for business expenses that are not ever recorded on the books.

Would you report it to the IRS? To HR? To anyone?

From my experience in the real world, especially at smaller CPA firms, there are plenty of transactions and things that go under the radar that you are apparently supposed to keep to yourself.

[Stilgoin]

It might not necessarily be a matter of keeping things to yourself. If you are the lead auditor, talk to management and bring up your concerns. If not, talk to your lead auditor. Sometimes what you see may not be what you think it is, but it is our job as auditors to make sure we perform our duties. Sometimes your duties may not involve cash payments. You have to be very careful. Auditing is a massive responsibility and you owe your employer and lead auditor the benefit of the doubt until you see otherwise. With that being said, if you feel there is something not above board, and you cannot find a resolution, maybe you should turn to your state board. You are responsible for what you know and see, and it is your job as a CPA to make sure you maintain your integrity, no matter the cost.

B | 62, 78
A | 73, 67, 79
R | 82
F | 59, 59, Waiting

Ethics | 93

"Success is not final, failure is not fatal: it is the courage to continue that counts."
~Winston Churchill

“In a world full of critics, be an encourager."

[Anonymous]

I've worked on audit engagements one on one with managing partners and there have been times when some of our clients had undisclosed sources of revenue. If I asked the partner about it, they'd say they didn't know what it was either and didn't want to ask about it. They basically leave it at that. One time a partner came back from a client with a black eye.

There are a lot of shady things that small CPA firm owners/partners know about and are involved in. Just curious what others would do or if anyone else has experienced anything of the sort.

[aaronmo]

Your job as an auditor is to remember who the end user is…so some of the answer depends on who is relying on the information, and what type of entity this is. You are not hired by the IRS, sec, etc…and it's likely not appropriate to report them. There are situations where that isn't true, but not for smaller clients. When in doubt, bring it to your immediate supervisor. It might require speaking to an attorney.

I would never – ever – allow myself to be associated with an opinion I didn't believe was appropriate.

[bucknell39]

Is the audit being done for a bank loan? Is this a government audit? It's one thing if you are doing tax work or a compilation and you have a client that withholds information from you but you are doing an audit and giving a professional opinion. I understand that the firm may be getting paid by the client to perform this audit but I would tell them to look for someone else. This is an owner performing these transactions. Reporting this issue to management will not solve the issue. This is a scope and GAAP issue. Also, you may want to look for another job if your firm is alright with giving unmodified opinions for a client like that. Just my two cents.

[Anonymous]

I've been working in public accounting for the last 11 years and there are always ethical dilemmas arising from audit and tax clients. There's a line between blatant material and outright fraud and “pushing the envelope.”

A CPA advocates for his/her tax clients and tried to do the best for them by “bending” the rules but not “breaking” them.

I was the lead auditor on a job where the client paid out small cash holiday bonuses to about 50 employees. Obviously the employees are not picking up the income on their W2s but what are you gonna say? Also, on the same client, a few years back we took a $350,000 sec 179 expense on equipment that had not been placed into service at the end of the fiscal year (I think the equipment went into service a month or two after). That one was definitely pushing the envelope far!

[Anonymous]

@bondvillain

Regarding the small cash bonuses – I would think that this should be reported. I understand it is small and immaterial, but is it not fraud involving management? It is also tax evasion which would face penalties by the IRS if reported.

If anyone can point me toward any literature regarding these types of cash payments (whether on or off the books), I'd appreciate it.

[bucknell39]

I think the issue with having actual knowledge of an employer paying people under that table is the circumvention of paying payroll taxes. The Department of Labor is very thorough when auditing these situations. I don't think this is a materiality issue. I don't think the Department of Labor would look favorably on the answer of “we knew they were paying employees under the table but since it was below our materiality we didn't follow though”.

[Anonymous]

@bucknell39

I agree. Many companies withdraw funds from their operating account to hold as petty cash (I've seen withdraws to petty cash up to $25,000 on previous clients). Then they will use this cash to book “miscellaneous expenses” that have no associated vendor/invoice/receipt or they don't even book it at all…

To make matters worse, what would you do if you actually saw the payment take place and your superior claims they didn't see anything or to keep it to yourself? Aren't there formal lines of reporting this illegal act? What about whistleblower protection?

[Stilgoin]

As a CPA, the FASB codification should give you your answers. If you are confused by the codification or cannot find what you need, ask your state board, ask your auditing professor, or ask the CPA that signed off on your experience. In other words, find a mentor you trust. Be aware you cannot share information about a client with any of these people.

There are specific rules about auditing and immaterial fraud in the codification. You are not necessarily responsible for reporting an immaterial fraud to anyone, and you have to be careful about what your specific duties are in an audit. Passing your CPA exams and being a licensed CPA means you are accepting the responsibility of being able to research topics such as this and find the answers that help you do your job to the best of your ability. You alone are responsible for your integrity, but you alone are also responsible for following the codification and making the best decisions based on the information available. If you feel you are involved in an audit where there is material fraud, it is your responsibility to report it to your superior and remove yourself from the audit.

Seriously- do yourself a favor and read the codification.

B | 62, 78
A | 73, 67, 79
R | 82
F | 59, 59, Waiting

Ethics | 93

"Success is not final, failure is not fatal: it is the courage to continue that counts."
~Winston Churchill

“In a world full of critics, be an encourager."

[aaronmo]

It's something that EVERY company does…it's like going over 55, and when we're talking relatively small companies and small end of year bonuses for regular employees, it's not something that is a huge deal. If we're talking significant percentages of pay, or distributions to owners, that's a different animal.

Let me tell you a story…

I was handling the books and reporting for a small company…I noticed that they were putting parking tickets in as parking expenses. I had just learned in my shiny new book that fines can't be expensed. I changed everything and then noticed that our tax accountant took it as an expense on the return. I didn't feel qualified to argue with a guy who had his letters, but I mentioned it to my dad, who was an accountant years ago. he told me:

1. pigs get fat, hogs get slaughtered. You don't want to be gross or abusive because that puts you on the radar.
2. You just need a quasi-reasonable argument…accounting is grey. A parking fine is, legitimately, a parking fee.
3. In the event of an audit, they WILL find SOMETHING, they will negotiate things and they have to find SOMETHING to justify the expense of coming out. Having something minor, standard and innocuous gives them something to pick up on and cover their bills. This is, in many ways, a game.

Keep in mind…almost half of the country just voted for a guy who stood up and outright said, if you know the process, that he's a schmuck who refuses to play by the rules with tax policy, and who made a mockery of NFPO regulations. They're all abusive in this area, but some are really gross…and apparently being really gross wasn't a disqualifier, and he's not in prison for it.

[sancasuki]

At my previous job (small company), they gave most of the bonuses in the form of an American Express gift card.

[nolan7120]

@aaronmo-

Care to elaborate on the below quote and provide citations? It was not worded very well.

“Keep in mind…almost half of the country just voted for a guy who stood up and outright said, if you know the process, that he’s a schmuck who refuses to play by the rules with tax policy, and who made a mockery of NFPO regulations.”

My impression is that Trump did engage in some minor shenanigans regarding his NFP (the painting, transferring of funds and calling them a donation) and that's about it. He fully utilized NOLs as would any business. Overall, I think it pales in comparison to the shenanigans and ethical violations that occurred with the Clinton Foundation.

FAR (6/9/16) - 81

[Anonymous]

Client confidentiality reduces, I think, what can be reported. Keep in mind that my public experience was solely in tax, so I don't know as much about auditing rules, but in tax, the ethics that I remember from REG dictated that you have to keep client information confidential, and if you believe it is wrong, then you should advise the client of this. If the client continues to do it wrong and refuses to change, then you can refuse the engagement, but you can't just take privileged information to the regulatory bodies.

In OP's position, I assume he's not in a post to reject an engagement. 😛 So, I'd say you have to determine whether you think your involvement in these issues is sufficient to cause you to withdraw from employment. Whether it is or not will depend on various factors, including your personal moral compass. When I worked in tax, there were things clients told us that I knew were false, and I decided to withdraw from that employment and seek employment elsewhere, cause I didn't want to be part of their fraud. It wasn't my place to turn down the clients, so I had to turn down the job instead. Difficult part then is to figure out how to make sure you're not jumping out of the pot and into the fire. 😐

So…I guess what I'm saying is, what you're seeing isn't uncommon, but it isn't right either. Whether it's within a range that you're comfortable or not depends on you and how much you assess the wrongs to be wrong. For example, if it's things that you consider minor, that you've reported to your manager in a documented way, you might feel comfortable with that, having done your proper reporting. But, if it's things more major, or that you don't think reporting to your boss will be sufficient cover for you, then you might prefer to leave. Know that “My boss told me to” isn't enough defense in a larger case; it's anybody's guess what's large enough to be an issue, and your own comfort with risk will determine where you draw your lines.

P. S. Giving American Express gift cards at Christmas as bonus is still reportable income. I've recently instituted a “No gift cards for employees” policy at my employer, because of the IRS rules on this. Clearly states that any cash, gift cards, or other items easily convertible to cash, must be reported as wages.

[Anonymous]

In public practice one must be ethical as well as pragmatic. In the example I cited, a client's management was giving small holiday bonuses of about $50 – $100 per employee to maybe 60 employees. The maximum exposure through my rough calculation is about $500 in employment taxes that the client has understated. From an auditing perspective this is a clearly trivial misstatement and wouldn't be accumulated in the proposed adjusting entries. This is also not “fraud” as another poster suggested. There are two types of fraud: intentional misstatement of the financial statements and theft.

However, this a an “illegal act” and but clearly inconsequential and thus not required for disclosure in the footnotes.

Lastly, you have to be pragmatic and sensible. The client broke some rules but the magnitude of the omission is clearly not material as my calculation indicates. Ask yourself: is the client willfully evading taxes by paying some small cash bonuses? No, that's not the intent; the intent is to generate some goodwill with their employees. Other ask yourself: do you want to be a whistleblower for $500? Not only will you potentially lose the client but you will damage your reputation with your firm and peers. Choose your battles wisely.

P.S. thinking it through again – you can certainly bring it to the client's attention that those bonuses are subject to payroll reporting and taxes and then leave it to them to either report or not.

[Anonymous]

So this happens to be a true story – someone I know saw the owner of a company making under the table payments using petty cash.

This person ended up discussing (whistleblowing) the matter with his superior as well as notifying HR only to be shut down and eventually terminated.

This person also visited an employment attorney regarding the matter providing written documentation as evidence for wrongful termination.

Due to the original employment contract's restrictive covenants, this honest accountant cannot pursue any litigation against the company and is legally prohibited from practicing accounting in the same county for the next 2-3 years.

This is very unfortunate and unreal for him, but unfortunately it is the reality we live in.

[Author]

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