Introduction
Accurate accounting information helps build trust among an organization’s partners because it provides clarity and transparency. This prevents fraud and mismanagement by clearly showing where funds have been allocated and how they have been used (Inyang & Nwabuikem, 2019).
Tracy and his brother Thomas are 50% shareholders and spend time designing websites and overseeing the company’s daily activities. Tracy has called me to schedule an appointment with me, without Thomas being present, to discuss the financial statements and the tax returns. He does not understand why the net income of the tax return differs and thinks his brother is manipulating the financial records. Therefore, this paper will address Tracy’s issues and provide a conclusion for his situation.
Issues
Lack of Accounting Knowledge
The first issue is that Thomas, who is responsible for the organization’s accounting functions, lacks accounting knowledge. Although he may be able to handle the company’s day-to-day operations, he does not have the necessary accounting expertise to record and report the company’s financials properly. He may not understand the complexities of accounting or how to properly prepare financial statements and tax returns.
In addition, Thomas may not be cognizant of any potential problems that could be occurring with the accounting records. This lack of knowledge could lead to errors in the financial reports and inaccurate tax returns that could result in penalties and interest. The corporation does not have a qualified accountant to handle financial information.
The second issue is Tracy’s lack of knowledge of accounting information. As a 50% shareholder, he should have some basic understanding of the company’s financials, including reading and understanding the financial statements, tax returns, and other documents related to the business. If Tracy does not understand the financials, then he cannot make informed decisions about the business and cannot identify any potential problems.
This could lead to costly mistakes if she cannot correctly interpret financial information when making decisions (Oats & Tuck, 2019). For example, if she does not understand the basic accounting principles, he may make incorrect decisions based on incorrect information. Thus, not having a basic understanding of accounting principles could make her vulnerable to fraud and other financial misdeeds.
Net Income Reported on the Tax Return vs. the Financial Statements
The third issue is that the net income listed on the tax return might not match what was reported on the company’s financial statements. This could be due to several reasons, including differences in the timing of income and expenses, differences in accounting methods, or errors in the accounting records (Schroeder et al., 2022). Furthermore, the variation could result from tax returns, such as deductions for expenses and depreciation, that are not accounted for on the financial statements.
The tax return includes non-cash items, such as capital gains, that do not appear on the financial statements (Crane et al., 2019). However, suppose the net income is significantly different. In that case, it could indicate problems with the accounting records or that the company is not following accounting principles.
Conflict of Interest
The fourth issue is the conflict of interest due to the relationship between Thomas and Tracy. A conflict of interest exists when two or more parties are vested in the same outcome. In the case of brothers Tracy and Thomas, who are both 50% shareholders in the same company, their shared financial interests could lead to bias or favoritism when making decisions.
This could result in one or both brothers taking advantage of their positions to benefit their interests at the organization’s expense. Additionally, when siblings own a business together, the potential for bias is a genuine concern. Although they may have the same vested interest in the company’s financial decisions, their familial relationship can lead to preferential treatment of one brother over the other.
Lack of Trust in Partnership
The fifth issue determined from the case scenario is that Tracy wants to discuss the problem in the absence of Thomas. Tracy intended to talk about the issue without his partner, and Thomas could be problematic for the partnership. The success of a business is built on trust and respect, and talking about a problem without relevant parties could be viewed as a breach of trust because they are not permitted to be a part of the discussion (Inyang & Nwabuikem, 2019).
Additionally, it could be seen as unprofessional and may lead to a breakdown in communication. This could lead to animosity between the partners, leading to decreased productivity and an overall decline in the partnership. Although there is no explicit rule against discussing issues without one of the partners, it could still be seen as a breach of trust.
Conclusion
I would tell Tracy that it is essential that he and Thomas be present during our appointment to ensure that the situation can be discussed thoroughly and professionally. This would enable us to get answers from Thomas and maintain their trust. It is possible that the difference in net income could be due to an error in the preparation of the tax returns or to an accounting mistake.
Additionally, Thomas may deliberately manipulate the books to reduce the reported income. Regardless of the cause, it would be beneficial for both parties to be present during our meeting to ensure that the situation can be discussed openly and honestly. I would encourage Tracy to learn basic accounting to review the financial records regularly to ensure the statement is accurate and prevent potential issues.
I would explain to Tracy that the net income reported on the tax return may differ from the financial statements for various reasons. For example, the financial statements may include non-taxable income, such as interest income, or expenses not deductible for tax purposes, like meals and entertainment. Additionally, some items, such as depreciation, may be calculated differently for accounting and tax purposes. Therefore, it is essential to understand the differences between accounting and tax rules to ensure that the net income reported on the financial statements and tax returns is the same. I intend to explain that his brother may not be playing tricks on the books, but the differences may be due to the different accounting and tax rules and regulations.
The Reasoning Behind the Conclusion
Tracy’s quest to understand why the net income differs from the one in the tax return is valid and important, but it should be approached with caution. The financial aspects of a business can be complicated and deep-rooted, and it is crucial that Tracy does not let his desire to understand the discrepancies derail their relationship and trust with Thomas, his brother and business partner. If Thomas finds out that Tracy is overly suspicious or accusatory of him, it could cause a rift between the two of them that could be difficult to mend. Therefore, as Tracy seeks to understand the discrepancies, it is integral that he does not let his quest get in the way of his relationship with his brother.
A Letter
Dear Tracy,
I hope this letter finds you in good health. I am responding to your query about the difference in the net income on the tax return. I believe the issue can be solved amicably without causing additional problems, such as deteriorating trust with your brother. The solution to the identified issues should strive to promote a positive relationship with the other business partner.
I understand that the discrepancy between the net income reported in the tax return and the income from the accounting records is causing you concern. There could be a few reasons for this difference. Firstly, the accounting records may not be current, or there may be discrepancies in how the income is classified. Additionally, the two sets of records may reflect different accounting principles.
These discrepancies can be resolved if Thomas, your brother and business partner, is included in the discussion. I suggest you both sit together and step through the books to identify the source of the discrepancy.This will also help to maintain the trust between you and Thomas. Furthermore, it would be helpful if youcould learn the accounting basics.This would allow you to be more involved in the process and help you identify potential future issues. I hope my suggestion helps you. Please do not hesitate to contact me if you need more help.
Sincerely,
Your Consultant
References
Crane, A., Matten, D., Glozer, S., & Spence, L. J. (2019). Business ethics: Managing corporate citizenship and sustainability in the age of globalization (5th ed.). Oxford University Press, USA.
Inyang, W. S., & Nwabuikem, J. O. O. R. T. (2019). Ethical thoughts in accounting and their effects on accounting practice. Research Journal of Finance and Accounting, 10(6), 147-170. Web.
Oats, L., & Tuck, P. (2019). Corporate tax avoidance: is tax transparency the solution?Accounting and Business Research, 49(5), 565-583. Web.
Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2022). Financial accounting theory and analysis: Text and cases (14th ed.). John Wiley & Sons.