Accountants & Bookkeepers; What a Waste of My Money!

Every client that graces my conference room table winces at cost estimates associated with creating and maintaining their businesses books and records.  Smiles and pleasantries mask the reflexive repulsive emotion just beneath.  It’s easy to spot, because it’s difficult for them to hide.  Fewer than 10% will embrace the facts; while the remaining 90% will leave with a concocted plan to have their business partner, friend, or spouse manage the businesses books and records, if at all.

Sure, you can dismiss this basic business function; but beware, the decisions you make today will create bigger and costlier problems within the first 3 years of operations.

My ‘unsolicited’ advice is usually the same – do what you want, but beware of the consequences.  Plan on paying good - hard earned - money for your dismissal of the law…  Wait!! What law? What consequences? 

All laws associated within the State of North Carolina are published and codified in the printed volumes of the “North Carolina General Statutes”.  These laws have been presented; debated; and passed by the North Carolina General Assembly, which consists of the North Carolina House of Representatives and the North Carolina Senate.

Currently there are 168 Chapters within the North Carolina General Statutes.  Within Chapter 55, there are 17 Articles – each with various sub sections.  For this publication, we are going to be concerned with just Chapter 55 Article 16 of the “North Carolina Business Corporation Act”.

Here is a table of contents of those subsections:

Article 1           General Provisions

Article 2           Incorporation.

Article 3           Purposes and Powers.

Article 4           Name.

Article 5           Office and Agent.

Article 6           Shares and Distribution.

Article 7           Shareholders.

Article 8           Directors and Officers.

Article 9           Shareholder Protection Act.

Article 9A         Control Share Acquisitions.

Article 10         Amendment of Articles of Incorporation and Bylaws.

Article 11         Merger and Share Exchange.

Article 11A       Conversions.

Article 12         Transfer of Assets.

Article 13         Appraisal Rights.

Article 14         Dissolution.

Article 14A       Reorganization.

Article 15         Foreign Corporations.

Article 16        Records and Reports.

Article 17         Transition and Curative Provisions.

As of the date of this blog post, there are currently 11 active sub-sections within Article 16, “Records and Reports”.  I will be discussing a few of these sub-sections in the coming posts. 

NC General Statute Chapter 55 Article 16 (G.S. 55-16) lays out the rules that any business, more specifically ‘corporations’ must follow with regards to the business’s “Records and Reports”.  Remember – a corporations and LLC’s have their own legal existence.  Thus, it's the corporation or LLC that owns the business, its assets, debts, and liabilities.

G.S. 55-16-01 §(b)&(d); ‘Corporate Records’ reads as follows:

(b) A corporation shall maintain appropriate accounting records.

(d) A corporation shall maintain its records in written form or in another form capable of conversion into written form within a reasonable time.

Notice that I underlined “Shall”, “Appropriate”, and “Written Form”.  So what does this mean to you?  When you see the word “Shall”, it is legal speak that means – “you will” or a “command”.  There is no room to wiggle room when the language of a statute speaks of a demand.  Thus, we can say that NC State Law demands that you keep a written form of accounting records. 

Now that we know what “Shall” means… what about “Appropriate” and “Written Form”?!  The statute leaves room for interpretation; but the business owner would be wise to draw the inference that it’s considered ‘appropriate’ and ‘best’ business practice to create, and maintain a written set of standard accounting books and records.

So what is considered “Standard Accounting Books and Records”?  NC law is not specific on this matter; nor are there other U.S. cases that we can draw reference too.  But we can look to other sources to help us define this requirement.  For example: “In the matter of Swan Services Pty Limited (in liquidation) [2016] NSWSC 1724 the Supreme Court of New South Wales” – in Sidney Australia, the court considered the circumstances in which a company’s failure to maintain books and records would invoke a presumption of insolvency.  In summary:

…a company is required, for a period of 7 years, to maintain books and records that correctly record and explain its transactions and financial position and performance, and would enable true and fair financial statements to be prepared and audited.  Further; the “Corporations Act” provides for a presumption of insolvency throughout a period in which a company has failed to keep financial records as required…

This definition of ‘maintaining books and records’ clearly defines what may have been the intention of the NC law makers and invokes common sense.  Even though the State of North Carolina’s General Statutes is remiss on this language, it can be assumed that the jurisprudence would apply this foreign courts precedent.  The Supreme Court of New South further expounded upon it ruling; stating that:

The Court outlined two circumstances where the presumption will arise:

1.       The company kept no documents within the description “financial records” in the period.

2.       The documents that were kept were deficient as to content.

In concluding that the books and records of “Swan Services Pty Limited” were deficient, the Court referred to the following outline of evidence:

1.       The business owner was unable to locate any signed financial statements (apart from 1 year) for the 7 years prior;

2.       Management prepared the business’s transaction accounts 6 months prior to the date they purportedly related to; and

3.       The court found discrepancies between income recorded in the unsigned financial statements and income reported on the businesses filed tax returns.

4.       Finally, the court found that “Whilst there were books and records that fell within the broad definition of “financial records” under the Act, these documents did not enable true and fair financial statements to be prepared.”

Beside-the-fact that you are required under law to maintain accurate books and records, doing so will save you additional frustration later on.  In fact, “poor accounting” is one of the top reasons businesses fail.  Without bookkeeping or accounting, you are blindly driving your business.  Avoid drawing unfavorable attention to yourself as a business owner.  Poor financial records and bookkeeping activities can lead to a public reputation of impropriety.