Your Accounting Habits Can Make or Break Your Lawsuit.
Did you ever consider the legal implications of your accounting habits? Perhaps you think good accounting only helps in the event of an IRS audit. Well, consider the legal implications of your bookkeeping practices. You will be surprised how much additional money you can make and how much liability can be reduced by having solid, well kept books of account. Here are just a few examples of how diligent bookkeeping and solid accounting can save and make you money from the legal point of view, or cost you hugely if handled poorly.
Good Accounting Automatically Reduces Fraud & Financial Suits
Fraud claims and suits for financial wrongdoing are common. Good accounting can help you win, or completely avoid most of them straight away. Think about it. You may be sued by employees who allege you have underpaid the bonuses keyed to their sales numbers. You can be sued by a landlord who thinks he is entitled to more percentage rent for lease payments based in part on your gross sales. You can be sued by competitors for dumping goods on the market at below cost, or by a purchaser of your business who claims you represented that it made more profits than it actually did. Suppliers can sue for bills they claim you haven't paid. Investors may sue for not being furnished annual financial statements or tax information. Each and every one of the above cases can be won, or avoided outright, by having solid and well kept books of account. By this, we mean monthly income statements, balance sheets, statements of cash flow, and good subsidiary ledgers monthly for sales, payables, receivables, and owner's equity. With solid accounting, you can show those thinking about suing you that you are correct and that they have no case. Without good numbers, litigation is the only solution, and it will almost always involve costly forensic accounting and expert witnesses. The ruinous expense of this kind of litigation makes it clear...good accounting habits can make or break you.
Selling Your Business Is Hard If The Books Are Poor.
As a business owner, you may hire an attorney to draft up the sale of your business. Selling a business represents the most important moment in a business person's professional life--the moment when all of their hard work is finally rewarded. If the books of account are sloppy or poorly maintained, it is practically impossible to find a buyer willing to put money in your hands and take your company off your hands. If you do find a buyer, it will be hard to determine a good sales price and the buyer will invariably push the price way down to reflect the uncertainty and risk. Keeping sloppy records can cost you huge multiples of profit. Don't be surprised if you end up leaving several years' equivalent of profits on the table, just because your bookkeeping is weak. So keep things ship shape when it comes to accounting. Use top of the line accounting software and make sure you have somebody keep the books who is very familiar with GAAP (Generally Accepted Accounting Principles, as promulgated by FSAB) and who knows double-entry bookkeeping like the back of their hand. It is crucial for your business success.
If your bookkeeping is weak, forget about bankruptcy discharges.
Bankruptcy courts make you account for every penny of your financial circumstances. If your business received funds and you cannot account for them with a solid and tight paper trial, meaning you cannot show where the funds went after you received them, you may be unable to obtain a discharge of your related debts. In fact, bad record-keeping can destroy the value of filing for bankruptcy in many business circumstances. This is merely one more reason to keep excellent books of account.