My client's bookkeeper had been categorizing owner draws as business expenses for 3 years. Their CPA signed off on it every year. I caught it in the first 30 minutes.
Picked up a new QuickBooks cleanup client last month. Small business — around $800K annual revenue. They'd had the same bookkeeper for 3 years and the same CPA reviewing and filing taxes for all 3 of those years.
First thing I do is run a P&L and something jumps out immediately — there's a "miscellaneous expenses" line that's unusually large. I drill down into it and find hundreds of transactions categorized as business expenses that are clearly owner personal draws. Things like grocery runs, a Disney trip, spa appointments, kids' school fees. All neatly buried in "misc expenses."
I flag it immediately and tell the owner. He goes quiet. Then he says, "My CPA reviewed the books every year and never said anything."
I do a rough recalculation. If those draws had been properly categorized, their reported profit would have been significantly higher — meaning their tax filings for 3 years were potentially understating taxable income. We're talking a material discrepancy.
The owner is now in a tough spot. He genuinely didn't know — he trusted his bookkeeper and CPA completely. His CPA is now saying it's the bookkeeper's fault. The bookkeeper is saying no one told her the difference.
I've now been asked to clean everything up and prepare corrected financials. I also quietly suggested they speak to a tax attorney before amending anything.
Here's what I don't understand — how does a CPA sign off on 3 years of financials and not notice that a business owner with a family has zero personal draws recorded anywhere in the books? Isn't that a basic sanity check?
Has anyone else walked into a client's books and found something like this? What did you do?