I am a new CFO. I've worked in banking for many years in the business and commercial side and was just hired 2 months ago as CFO of a small business ($6 million in sales last year) to save them from a bad financial spot. I have an MBA in Finance, but I have never served as a CFO before. My boss is the owner and CEO of this business. He blatantly uses business funds to pay personal credit cards, expenses and even his mortgage. I brought it to his attention while he was on a vacation and he dismissed me. I'm waiting for him to get back in two weeks to discuss it further. I'm unsure if he just doesn't know any better or if it's malicious intent. He's been in business for over 30 years so how could he not know?? I am terrified that I could somehow be liable for his tax evasion, and I really don't know what to do. I'm young and fairly fresh out of college so I really don't want this to tarnish my future career. Any advice is very much appreciated.
What should I do if I find out that the CEO of my new job is committing blatant tax evasion?
Answers
This is not unheard of. You have three options.
1. the obvious one, leave.
2. tell him you need to add to his taxable income the amounts of company funds used by him personally
3. OR place them in a Loan account and charge interest
I would have a talk with the company CPA (Income tax preparer or external auditor) and his personal CPA (more likely one and the same) first...and find out what is going on and why the treatment. Depending on who is the source of the information/practice, there is a chance that you can find an ally, or you can argue your position with him/her.
One thing I have learned throughout my professional (to include audit) career is to NEVER jiump to the MOTIVE....question or challenge the action/practice.
Document, document, document.
Make copies of the evidence.
Make file notes of your conversations with him and with the company CPA if you talk to them..
Keep copies of any relevant emails.
Follow Emerson's advice in the last sentence: don't jump to a conclusion.
Is he expecting you to prepare his taxes or does he have an outside CPA firm? If he does have outside CPAs I would do nothing until he comes back unless you can frame it as the outside CPAs calling you for a typical call as they gather tax information. As an interim step, can you examine prior year tax returns and compare with the books? (I assume this is a flow thru) the outside CPA firm may find and correct all this stuff on his taxes and ding him with a distribution so that everything is good at the end of the day for taxes and compliance but the optics are bad from your perspective.
Why can't you take it out of the CEO's distributions? That will definitely show up as income for tax purposes.
As the owner of the business, the CEO can use company funds to pay personal expenses any time he wants. The key question is whether those expenses are properly recorded in the books as distributions, or mischaracterized as business expenses. And, in due course, whether they are accurately reported on the company's tax return. As CFO, the proper recording of transactions and accurate tax reporting are your responsibility. Do it right and, if the CEO doesn't like it, quit.
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Hi Stephen, I think that while the Owner "can" use company funds to pay personal expenses any time he wants, if such behavior prejudices (i.e. causes financial harm to) creditors or lenders/bankers, then I think there could be a case for reckless fraud charges against him.
Any bankruptcy experts here?
"Taking" money from CEO distributions doesn't solve the problem. On the face of it (again, get the facts before reaching a conclusion), distributions to the CEO should, properly, be increased. Depending on the facts, there is the potential that the business and/or owner may have filed prior tax returns that overstated business expenses and understated income (and, therefore, taxes). This is also known as tax fraud, not something the IRS takes lightly because they believe it is rampant among small businesses.
You could make the case to the CEO that in the long run having to pay tax and penalties will be far more costly than what he thinks he's saving by paying for personal items under the table. This isn't a matter of does he know it's wrong, it's that he wants to get away with it. You could convince him now with you coming on board it's time for him to make a clean break of these activities and start on the straight and narrow because a lot of lives are ultimately at stake (employees and his family.) This could make you the hero of the situation if you handle it deftly enough to help him see the errors in his ways without making him feel defensive. If he has a company attorney and CPA they might be good allies in working this strategy. Unfortunately this has more to do with human response than addition and subtraction.
Welcome to the world of small business. Owner hubris is enough to give one gray hair.............or worse.
However, contra to several points others have made here:
1) I've encountered this and similar personal use of business funds and assets where said business has been previously subjected to an IRS audit with no serious findings having occurred. Trying to convince a wayward owner to act otherwise after those weak audit results is futile.
2) Outside auditors, even Big 4 firms, often overlook this kind of stuff or downplay it in an effort to retain the client. They will cover themselves with certain, carefully worded internal documentation. But they won't be the "enforcer" on the matter and they won't include it in their opinion or as a material finding. I have known them to make very generic remarks in an MOIC or in their footnotes about potential issues with these practices. But nothing specific enough to create a red flag in the published financial statements.
Over many years, I've lost a lot of respect for CPA audit firms. They just aren't as diligent as they hold themselves out, and the public expects them, to be.
The good news is, if you're not an NEO on the corporate bylaws, you have little to fear in the way of personal liability.
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I'm inclined to agree with this assessment. Ultimately there's extremely little reason to believe you have any personal liability if you are "just doing your job of following instructions from the owner."
Other circumstances aside, it will be a sad commentary on the field/profession if the minimum bar is personal LIABILITY (or what is legal) instead of personal ETHICS.