I had an interesting conversation with a restaurant owner the other day. We were discussing tax audits and he mentioned that he wasn’t worried, because his accountant had signed off on his financial statements. He thought that his accountant was responsible for paying any additional tax that might be reassessed by the CRA!
I explained to him that even though his accountant “signed off” on his financial statements, he was still responsible for their accuracy and completeness. He looked at me like I was crazy! His accountant had merely compiled the financial statements, meaning he had simply put the owner’s financial information into a financial statement format and checked it over for glaring mistakes. In many cases, accountant’s don’t even take a close look at the general ledger entries to make sure that items have been recorded in the proper accounts.
The accountant wasn’t responsible for identifying fraud. He wasn’t responsible for checking margins on food, wine, liquor and beer, to ensure they were reasonable, given the restaurant’s sales mix. He wasn’t responsible for theft that took place under the owner’s nose. He wasn’t responsible for the bartender’s over-pouring. He wasn’t responsible for the chef’s drinking problem nor was he responsible for keeping track of the use of alcohol in recipes. He wasn’t there when the owner gave drinks to his best customers and friends (no sense ringing it in, if it’s only going to come off the tab). It’s clear to see that the owner is responsible for the things that cause tax reassessments.
Most, if not all, accountants obtain a signed engagement letters from their clients each year, which explains that the client is responsible for the accuracy and completeness of the financial statements. Given the likelihood of clients not really reading them, accountants should try to point out the key terms of the engagement and repeat it again in the management representation letter that the owner signs prior to the release of his financial statements.
I guess the restaurateur’s accountant had not made sure that his client understood the terms of their relationship. Both of them could be in for a nasty surprise when the client is audited. The owner will get the tax bill and fire the accountant, because he wouldn’t pay it! Yet another reason for restaurant owners to be proactive in preparing for future tax audits. Don’t rely on your accountant to protect you, unless he has been asked to do so specifically. If you are reassessed, it won’t be your accountant paying the bill!