One of our client uses QuickBooks to input their own financial information. I noticed client manually entered a whole slew of customer invoices with offset to accounts receivable resulted in increased sales. None of the invoices seem to have any backup attached in QuickBooks. The client asked me to issue a salary (T4) based on those revenues.
My confusion is should I question any of their invoices? My boss says we are only compiling their data to prepare T2, “it’s not our job to verify the accuracy or detect any irregularities, we are not auditor. We rely on client’s information to provide us truthful info. We inform client they should have supporting documents in case CRA asks for it.” I am confused, should I prepare T2 based on the financials client provides. As as tax preparer, should I take their word as is. Is this a normal practice for a tax preparer in the industry.? Any comments? Thx.
I wouldn’t. If something looks fishy ask questions. You are supposed to be filing that it is complete and correct to the best of your knowledge. If it looks reasonable you don’t have to ask all sorts of questions but if not then you are required to ask questions and document the answers. If the answers still don’t make sense then you don’t file the tax return. I would ask if the invoices in A/R were collected after year end. If they were then they were legit even without any back up in quick books but if they are still outstanding months after year end I’d have some pointed questions for the client about what happened there.
I’m a CPA, CGA, and this would be a compilation for me. The larger firms seem to have a high risk tolerance, and often take the client’s information and do F/S and the T2 without checking anything. I’ve always worked with small firms, and, even when compilations had few standards, I would always get a bank statement & reconciliation, an aged A/R listing, an aged A/P listing, copies of all capital asset additions/disposals, and the list goes on. I examine in detail any account balance that seems out of line. I question any old A/P or A/R. Check to see how screwed up they’ve got their HST and source deductions. I almost always do the client’s T4’s and/or T5’s, so these summaries are then reconciled to the underlying accounting records. I always go back to the code of conduct rule that you’re not to be associated with any financial information that “you know, or should have known to be false or misleading.” I’m adding my name to these F/S, and I damn well don’t want to be embarrassed later on. I honestly don’t know how some accountants do little work and get away with it. I view my procedures as necessary in order not to contravene code of conduct rules. A review engagement is a whole different kettle of fish. In the past, I have made material adjustments to F/S for things that either inflated or decreased income, and, I might add, with no push-back from the client. So, in the end, it comes down to your personal risk tolerance. In a small area, it’s probably better to turn down work, rather than get the reputation of being an “anything goes” accountant.
The revenue is irrelevant to T4 preparation. If the corporation had employees, those employees would have been paid throughout the year, and the T4 slips/summary must be prepared based on the actual payroll values. If the CLIENT asked you to prepare T4 slips, be sure to ask your boss:
- If the client engagement includes T4 preparation - your boss may need to bill for it separately.
- Why the heck the client is referencing “that revenue” in relation to payroll? Your boss may want you to ask the client that question, but your boss should be made aware of the strange request.
Thanks laurie, jhd.hemeon, Nezzer. Your response is greatly appreciated.
I share the same view as you all stated. Initially, whenever I raised a question my boss typical answer was it is not an audit engagement or we are not auditors or client takes the burden. As my learning curve is going up day by day, I am realizing that even though client is responsible but we should also develop ways by which to corroborate the information.
Regarding T4, basically the client has employees on payroll in 2022. However, in this case client asked us to issue him a T4 he needed to support his mortgage.
Here is my question to ask you guys. If I have company XYZ. I use quickbooks to enter my data. At year-end I gave you P&L and balance sheet, would you take that and prepare my T2 without any further question.? or would you tell me that you want to review my quickbooks financials first before preparing T2? Also, if I ask you please issue me $80k T4 because I have $150k revenues enough to support the requested T4. Would you issue me a T4 without any further question? That’s what I would like to know. Thx.
No, I would not do a T2 based only on numbers from Quickbooks (or, any accounting system). I just don’t do it.
No, A T4 can’t be issued. T4’s are issued on the cash basis, meaning, you can’t have a 2022 T4 for a salary paid in 2023. Plus, the deductions are now over a month late, depending on the remittance frequency. It’s not your job to facilitate mortgage fraud. If your client is determined to do this, he can get the form and fill it in himself. And, a lender is not likely to be satisfied with a T4, legitimate or not. They will want a copy of his T1 and the related Notice of Assessment. You need to walk away from this client. Now.
Nope! I verify all the balance sheet accounts and spot check the income statement. Just today was reviewing a set of books prepared by a professional bookkeeping service and there were things that needed to be fixed. Clients that prepare their own books ALWAYS have errors. Firms that don’t take do this kind of review will eventually loss the client to someone that cares.
Hmmm… If the slew of invoices at the end of the year are legit I guess no problem but if just wanting to make the personal banker happy there would be no reason to fudge the corporate revenue. Also if he has some problem with paying his mortgage where is he going to get the money to pay the tax on the T4? Is the corp taxable? Not a good tax strategy to create a loss by paying yourself personally…
Your boss is correct that a compilation does not require analysis of the Quickbooks records - you do not necessarily need access to them. But, in most cases, the client WANTS their accountant to review the accounting records and tell them if corrections are needed. Access to the Quickbooks records makes that job easier, but it is possible to compile financial statements with just a trial balance and a few reports (AR, AP, etc). With or without the full accounting records, it would be wise for your boss to insist on getting some supporting documents from the client (bank statements, etc).
There have been tax court cases where the accountant was held responsible for preparing financial statements that were false or misleading. In at least one case, the judge ruled that the accountant SHOULD have known better and fined the accountant several thousand dollars. As such, your boss may be risking similar consequences. But, that is his/her decision to make.
And if no financial statements are being prepared (just filing the T2), there is less risk - CRA will hold the client responsible, not usually the accountant. On the other hand, preparation of a fraudulent T4, which was specifically requested by the client to purposely defraud their mortgage financier, would most assuredly get your boss in trouble.
Thank all for providing me your valuable advice. After your advise, I sent email to client and questioned his invoices in quickbooks which are overdue since Jan 2022 (as they are all coded to AR). The client told me that he has received payments against these invoices. He has yet to update the receipts in quickbooks. He wants me to issue him T4 and file it by due date. He asked me what proof can he provide to show invoices are legit. I told him show me bank deposits against these invoices. He asked if show he show 10 to 15 invoice deposits, would it do? I told him, let’s start from there, show me top 10 invoices. My question to you guys is… What if top 10 invoices don’t add to much.? what can I ask from client that can serve as a good proof and not too burdensome on the client either.? Thanks.
I’d tell him to get his bookkeeping up to date then talk again. He sounds like he’s doing something fishy. Issue him a T4 based on what he actually drew for the year. That has nothing to do with his deposits or A/R balances.
Thanks Laurie. Regarding T4, she was not on company’s payroll. She wants me to issue her T4 for 2022 and she will pay all the source deductions and late charges to CRA because she owns the company.
I’d do ineligible dividends on a T5’s not T4’s in that case. No penalties.
You’ve already been warned against preparing a T4 to try to fool a lender. Don’t do it.
Thanks laurie and jhd.hemeon for the advice. No I am not issuing a T4 in this particular case, I will be letting boss know that I am not comfortable doing that. Thanks again.
Should I tell both client and boss that I cannot issue T4 because client was not on payroll in 2022.? Is that a solid rationale.? Thx.
"Should I tell both client and boss that I cannot issue T4 because client was not on payroll in 2022.? Is that a solid rationale.? "
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In addition to the ITA preventing what you are being asked to do, you may want them to read parts of the Criminal Code, which you could be participating in…
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"380 (1) Every one who, by deceit, falsehood or other fraudulent means, whether or not it is a false pretence within the meaning of this Act, defrauds the public or any person, whether ascertained or not, of any property, money or valuable security or any service,
(a) is guilty of an indictable offence and liable to a term of imprisonment not exceeding fourteen years, where the subject-matter of the offence is a testamentary instrument or the value of the subject-matter of the offence exceeds five thousand dollars; or
(b) is guilty
(i) of an indictable offence and is liable to imprisonment for a term not exceeding two years, or
(ii) of an offence punishable on summary conviction,
where the value of the subject-matter of the offence does not exceed five thousand dollars.
Marginal note: Minimum punishment
(1.1) When a person is prosecuted on indictment and convicted of one or more offences referred to in subsection (1), the court that imposes the sentence shall impose a minimum punishment of imprisonment for a term of two years if the total value of the subject-matter of the offences exceeds one million dollars."
Again - the invoices are irrelevant when preparing a T4. Even if your question is not related the T4 preparation, there is still no issue. There is no reason to demand proof that the client collected their revenue. At most, you could ask the client if they believe the amounts are uncollectible. If so, you could offer to record an allowance for doubtful accounts to offset the AR balance. If not, just leave it alone. It is completely okay to have an AR balance on the financials. When doing a compilation you don’t need to do anything about old AR amounts (though it is NICE of you to ASK the client about it, and try to help them if you can).
If you are not a partner or manager in the firm, it is not your call. You should not tell the client anything. You should only tell your boss. Yes, you should say that the “client was not on payroll in 2022”. Then, do what your boss tells you to do. However, if your boss tells you to do something illegal, that may be an ethical dilemma, but not an accounting or tax question. You might try to convince your boss not to proceed with the crime, or you could refuse to do it yourself, or you might want to quit and find an employer who does not engage in criminal activity. You may have other options or ideas. Hopefully you can figure it out.
"that may be an ethical dilemma, "
… or a criminal one…
Thanks so much for your comments @Nezzer, @jhd.hemeon, @laurie. I appreciate everyone’s valuable input. The fact that I post these question in the forum is because I want to know what is acceptable and what is not. So, when I approach my boss I can pinpoint the issue and reason for my uncomfortableness. Your comments really helped in that.