Nothing in this email is intended to denigrate my CPA friends or the CPA community as a whole. That said, if you work as an accountant in a company and are given AJEs or RJEs by your outside CPA you should not record them unless you BOTH understand and agree that they are reasonable (and discuss any difference of opinion you may have). I take these as suggestions, not commandments, even if there happen to be ten of them and they are carved on stone tablets and delivered to from a mountain on high!
For those of you patiently waiting for the definition of AJE and RJE, wait no further. AJEs are Adjusting Journal Entries. These are usually to correct a mistake or sometimes to deal with a more complicated issue about which internal staff needs some assistance. Further, most small companies only use outside CPAs at tax time and therefore need to distinguish entries that are for GAAP (Generally Acceptable Accounting Principles) versus tax entries. Some companies keep tax based books while others maintain GAAP books and allow the tax CPAs to carry any book to tax adjustments on a separate ledger. The latter is my preference. RJEs are Reclassifying Journal Entries and are typically presentational and either can be omitted or made on the last day of the year and reversed on the following day of the next year.
Now, why do I say these are merely suggestions? Because the outside CPAs may not have a complete understanding of the circumstances and are almost always providing these entries during busy season.
Several months ago I personally recorded JEs for a newer client because I wanted to understand them in detail. They got to me long after taxes were filed and some of them were from two years prior. What I learned was that the tax CPAs were inadvertently reversing bonus accruals that were entirely appropriate This caused a misstatement of costs and earnings. When I questioned them on it, we all agreed it was poor communication but also there was a lack of anyone before me questioning the purpose of the entries. We agreed we would do better this upcoming year.
And more recently, another internal accountant booked an entry they were given by the outside CPA even though thinking at the time it didn’t make sense. To compound matters, I missed it in my review. It was the CEO who noticed a number that didn’t make sense to him. It’s always fun when the client catches a mistake! The outside CPA is a smart guy. I like him. But that doesn’t mean I should accept everything he says without questioning. As soon as I pushed back, he realized that the facts were differed from his understanding. Ultimately, poor communication (and during busy season). The only bright side is that I used this as a teaching moment for the internal person (also someone who is smart and that I like) but who should have had the confidence to trust their own judgement and question the CPA. I guess another bright spot is that it gave me some content for this article.
If you’re a CEO or owner, do me and yourself a favor and forward this to your accounting team.
If your business could benefit from fractional CFO services, I would welcome the chance to speak with you. Please give me a call at (314) 863-6637 or send an email to [email protected]
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Ken Homza
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