Ethical Dilemmas in Legal Accounting

Welcome to Accountants LawPod, where accounting professionals and law firms converge. Hosted by Lynda Artesani, Sarah Prevost, and Stephen Libhart.

Welcome back to the podcast, everyone. And today we're going to talk about ethical dilemmas in legal accounting. But first, Sarah, how cold is it where you are?

Okay, so I'm actually really— I'm kind of shivering.

I see you have a couple of layers on. I actually do too. 61 in Florida.

With really cold in Florida. So it says it's 35 right now on my phone.

What's the wind chill? Because that's not what it really feels like, and I don't think they call it wind chill.

We're actually not that windy, but it got— so it was a low of 28 last night. I will tell you the running joke. We did my son's celebration, his birthday dinner, and we're headed home, and I said, give me those car keys. I will get to that car faster than anybody in this group, and I will have it heated and turn it on. And he's like, okay, bye. And of course, I have the car warm and fast. Yeah, my husband's like, there's no way. There's, um, but last night was freezing, and this morning I could not stay warm. Last night it was so cold. But, um, it's supposedly— I don't know if it's record cold, but it's supposedly really cold. But—

Well, snowing in Florida. Yeah, snowing in Florida and northern Florida. So Tallahassee, far, far away for me. But we are going to go down to 39 on Saturday.

So that's pretty cold.

That's cold, Lynda. But not— we've had colder because we've had to cover our flowers because the frost comes, it'll kill them. We've had to put tarps on the flowers. Oh, really?

Okay.

Probably about 20 years. Every 20 years we get this little bit of—

I was going to ask you how frequent has something—

okay. Wow. Usually it lasts like a couple of days. We're getting one day of the 39 degrees, which it won't be 39 all day. That'd be in the morning when it kind of drops. Yeah. But yeah, it's not, not typical. Mm-hmm. It's pretty dry here right now too, cuz we just had, it was 70-something degrees and it was humid. And I'm like, wow, it's humid. You know, my hair went, I'm like, okay, it's really warm. And then all of a sudden the next day it's been, it's been really windy too, which is really unusual. We don't get a lot of wind contrasted to Rhode Island, which was like, right now it's bone chilling cold.

Yeah. That's what I was told. I'm like, it's so cold right now. And I'm like, is it gonna snow? I mean, there's frost outside my little home office here. There's frost outside on the stoop here. So I was like, okay. Yeah.

And we'll I'm looking at all the things online and people complaining because it's so cold. I'm like, oh, that's kind of why I live down here. I don't like that cold and the snow. I don't miss shoveling snow. No, no, no.

None of that. Well, I think it's kind of like legal parts of that too, because you're required to have your sidewalks, probably, if you have a sidewalk.

Because you're a landlord.

You did.

And I can tell you the dilemma I had as a landlord in Rhode Island with the snow was that we shoveled. We had a really big storm, one multiple storms that layered on, and then we had even, we had to actually take, the guy would come and take the snow out of it and they were dumping it into the Providence River. This is a while ago when they, you could do that because they had to get it out. There was no place to, the piles were so high. And we had a tenant climb over the snow pile instead of going through the walkway that was shoveled and he sued us and he won. Insurance covered him because he was a dope and walked over the pile and fell, I'm sure intentionally, instead of walking through the walkway that we created. It's like, why would you do that? But, you know, people look for ways to screw you over.

Yeah.

I just couldn't believe that because it happened, it was like, that was stupid of some— I mean, these were big piles.

Yeah.

I was like, why did— I wanted to say to the guy, I'm sure it was like, don't talk to them. They're like, I want to say to them, why, why didn't you use the path that we had? Like, we had paths.

Where's your logic? Do you have, like, common sense?

No logic. The logic was I'll hurt myself so I can get the money. So, but I mean, with legal bookkeeping, when you think of ethical dilemmas, the first thing that comes to mind is, like, we do conflict checks, right? So the, the law firm will do a conflict check. So we have to have all the, all, we have to have all the names of all the clients they've ever had. So in case there's a case or matter that comes up, that's got somebody that's involved with somebody else and you've already represented that somebody else, they have to have the ability to do a conflict check and search for that, which is something if you're new to the industry of working with lawyers, you'll hear that term. What the heck does that mean? Well, that's kind of what that means. That conversation most of the times about a data migration where somebody wants to bring in every customer name from the beginning of time, which could be 30, 40 years of a law firm being in existence. And then how much data do you want to bring in? And bog down the QuickBooks file. But for good reason, they want to have it for conflict check. That's kind of where my brain went when the topic of this topic came up, is that—

Yeah. Well, and I was thinking too of like some of the ethics that we advise on in the sense of who's overseeing certain books, like especially if you're somebody of a certain size. So we, we always say if we're going to do bill pay, we want a secondary signer you know, it's not on us. We want an approver, essentially, is what I'm trying to say. And so we, we try to work within that, even though we're outside. Even if I was an inside employee, we would want to have somebody else signing those checks, or we'd want to make sure so that there's no pointing fingers of, oh, you just paid this without approval, or little things like that. But then you've got— Yep. You've also got to have a system specifically with trust where you have oversight, where we've seen this before, Lynda, where we'll see statements produced for final settlement and no one looked it over and it's off by a lot. Well, you need assurances that it's right. So ethically you should have somebody over, like you should have a stair-stepped process, I guess you could call it, like We think of the ethical dilemma.

We take on a new client, we look at the balance sheet to see what the accounts are, and then we see there's like 30 cents, $1.50, $29 left over, and they don't return it or even attempt to return it, and the matters are years old.

Yeah.

And it sits on the books. That's an ethical dilemma because they're supposed to give back what's not used with a retainer.

Yeah.

And that's a place that you could see it. And then sometimes they did try to give it back, but the person who's going to cash a check for 30 cents, most people don't want to bother with that.

Mm-hmm.

Sits on the books because nobody wants to cash it. And then you have to take those funds and they need to move it over to the state. And there's a whole process there, which is a sticky process because we've seen it where we've helped clients do that and then they A check that's been sitting out there for 5 years that had a stop payment on it. Yeah, that's part of the process, gets cashed. Yeah, after you turn the money over to the state, it's like, what do I do now? I've paid them twice, I've overpaid, and there's nothing you can do about it.

Nothing. Well, it's interesting too that you bring that up because at some point in our journey we learned that stop pays are not guaranteed for however long.

Which I didn't know that. I thought They were good forever.

And it's interesting because I went to go potentially issue a stop pay at a totally different bank, not nearly the size of the one that you and I had this initial involvement in. And it had like a warning sign on it and it said it instituted a whole policy about stop pays and how they're not guaranteed. And I was like, wow, that is shocking because you pay a lot of banks for those fees.

You do.

Then you, you kind of brought something up too that made me think of, we also see this a lot with uncashed payroll checks and you turn those over or they're unaware. Like I get, I totally get the idea of handing out, you know, bonus and/or specialty moments and handing those out as checks. Well, not everyone is diligent about cashing those checks. So it would be actually very nice of you to actually do it as a direct deposit, maybe on a separate day. But then you are—

That's why direct deposit is way better, right?

We try to encourage that all the time. Like, let's get away from the check writing when it comes to payroll for that reason.

Yeah, because then, well, you're also left with the burden of if they don't cash it, you have to remind them or turn it over if they quit. It's a lot more of a headache than just purely just another ethical thing that I'm thinking of as we're chatting.

How about a client that gets retainers for ask for retainers, get some on the books, and then just so happens that month when they do the billing, it's exactly what they collected as a retainer is what they bill. So they wipe out all their retainers every single month.

Uh-huh.

I guess. Before they bill the clients.

Yes.

How do they know exactly?

Yeah, that's a little suspicious.

You see that pattern, it's like, hmm.

That is suspicious. Or just what about the—

Especially when they change it when they discover that, oh, there was actually more money in there than they thought. So then they go and change the original, the bill, so that they can make— so they take it all. It's just, to me, it just doesn't sit well with me when I see that.

True. The ethics too surrounding, you know, what is an expense, a true business expense versus not, and the burden of proof ultimately is, you know—

Or the timing of taking the— applying the trust.

Yeah, but the burden of proof is not you're not protected just because you have an accounting person doing the work or a tax prep. No, it's you as the business owner. So there's ethical standards there. There's, there's a lot of areas like we could, I could totally see where I could see us, uh, like if we were to say hypothetically ask an AI tool what this means, what it spits out. Mm-hmm. I could see it where I'd be curious, because some of it, I'm presuming some of it being tax guidance, let's say it will stop and not provide that, because there's like a whole body of work that's behind an ethical tax piece that happens for every professional, right? But I really feel like if you, no matter what, if it's— if you feel like you don't have enough security or measures in place, or a secondary set of eyes, that's probably a best place to start. Like, if— are you— like, we see this a lot with owners. They're working really late. They're trying to get everything done, and they're coming back and saying, I don't even know if I did this right. Well, this— it's not like we're judging you. We just want to help you and make sure that you remain compliant. California has those rules in place for trust accounting. Why would you want to risk getting it wrong? Just make sure it's compliant. Similar— we've, we've heard about this too. This has happened to us multiple times. We've gotten into a conversation with someone And we'll ask about the predecessor that was doing the role, and we find out that there was theft and fraud to the tune of a lot of money. Well, there was no oversight. There was no cross-balancing and checking. And partly why working with folks like us, either in tandem with your accounting group and/or as a solo, is because you can have checks and balances, because we are not wanting to be liable. to misappropriate something, pay something wrong. So much protection we want to do. We want to protect our staff and ourselves. So it's an interesting conundrum that people get into and they don't— you don't think the long game. You're just thinking of, oh, I'm just getting started.

Or I got another one for you. How about somebody spends a lot of money on things that they want to call it advertising or entertainment? It's not. You look at it, you're like, you took that personal trip. For your family or whatever that had nothing to do with business, but they want to throw it through the business to take the deduction. And in that case, I think as a bookkeeper, the best thing you do is get that in writing that they said that this was a business trip and put it in. And that's it. Because we can't be the gatekeeper of everything.

No.

Yeah. And I think people a lot of times try to stretch as much as they can to get tax advantages. And I mean, you know, we all know, like, if you bought a Gucci purse or whatever, that's most likely not advertising.

But unless you're in some sort of line of industry that makes sense, that ties back to a profession that is that type of profession.

Right. It has to be something that would make sense to it. I mean, because we've seen it. We had that. We've talked about before where they tried to write their head cut off or their business suit off and you have to have that conversation of what's legitimately an expense and what's not. But a lot of times the transactions, and we're kind of going through that now at this time of the year where we're giving them what they took as what we've coded as distributions and maybe they went to museums or whatever. And then we need to know like that's not a business expense, that's actually an expense that you use personally, but use the business credit card. So it becomes a distribution, it doesn't become an expense on the books. Nor do we have a place for that other than advertising and marketing. We don't really have a place to put if you bought football tickets to go to the Super Bowl.

Yeah, yeah.

No place on the books for that. I can put it in entertainment, but there's no, you don't get a deduction for entertainment. I'll throw it in there, but that's where it's going to sit and be removed by your tax professional.

Well, let's be honest, some people don't even have the conversation. They'll do the books. We've seen this book. Accounting professional will do the books. Tax person comes along, depending on the tax person, they do it a certain way and no conversation's ever had with the business owner. I think it's doing your due diligence to understand things. Now, like you said, I totally agree, we are not the gatekeeper, but we're also not in a position— we're business owners, we're not in a position to flat out just be told to do things if we find it ethically wrong either. No.

So can you sleep at night? That's what I like to say. Can you sleep at night with this decision of where you're putting this on the books? And please put that in writing so I can take that snippet and stick it inside my transaction so that I can remember it 3 years from now when you're audited, why I put it there. You directed me to put it there because I don't want to have that on me. I know I'm looking at this going, this is not a business item.

You know? Totally. Yeah.

That's one of the ones that's definitely a gray area. And you run into that with all industries, not just the legal industry, it's all the industries straight across the board that people put some things in there and you're like, you know, you went to Starbucks and bought a coffee, it's not deductible if it was your coffee.

Yeah.

It's only deductible if you take a client out and then you have to give me the name of the client.

Right.

Yeah. Or your staff. Right. So it's got to be that way. And I think sometimes I think because we had meals not deductible and then, I mean, meals at 50% and then it came back to being deductible after the pandemic. So to get the rest, help the restaurant industry. So then it was 100% and now it's back to you only get the 50%. And I think sometimes that can kind of cause a little bit of confusion whether it was here, then it wasn't, you know.

Yeah.

It was, then it not again. So I think that that's part of it.

Well, and like any, anything, any administration change, anything that changes at a certain level, government body, we have to follow whatever the changes are. So we don't get to decide sometimes. We're working along and we're like, okay, it's done this way currently.

Yeah.

Rules change. Now it's going to be done a different way.

Yeah.

We're the messenger.

We try to code it on the chart of accounts, see it. So it's kind of a reminder because you hand over the records to the tax person, the number doesn't always perfectly align with what we say the profit and loss is at the end of the year. There's always tweaking going on, depreciation added and things like that that you kind of can see that it might—

There is a book-to-tax difference too at times.

Yeah, there's always a book-to-tax.

There's gonna always be some sort of, but I really feel like in our profession for us, and though a lot of us, you know, we garbage in, garbage out, we've always said that code of ethics, you know, just 'cause you're hopping from accounting professional to accounting professional to get them, I mean, to do the things that you did, we see that, we're a small industry. But ultimately, it's in our best interest to want to provide you, especially if you're telling us, you know, you want to sustain, or you have growth, or we want to provide you accurate data. It's a byproduct of our work. Right? And there's a lot that goes behind a lot of this stuff. You know, we'd never want— I think the thing that for us as a profession, we just We never want to be in a position where our guidance isn't based on some kind of, you know, some sort of fact moment that could back it up. Um, a lot of people interpret things the way that they want to. It's our interpretation of what we understand it to be based on what our profession tells us it is, and the way that we've worked too. Ethically, that's what we will do.

Yeah, and I can, I can see, I mean, just something as simple as, all right, I have a social presence. I'm on—

Yeah.

X or something. And then I don't have enough followers. And I've had people approach me saying, you don't have enough followers, you can buy these from me. And I'll— and, you know, it's usually somebody over in another country that's like selling me followers.

Followers.

To me, that doesn't sit well. Like, that's fake.

That's fake.

It's like a fake review. I don't want that. I want real. I want the real deal. And if it takes me 10 years to get the followers, then so be it. But That's another place. Or the likes, you can buy likes even. So some of that stuff isn't real. Maybe even reviews. Sometimes you look at reviews and you get, I don't know, did they buy them? Did they give them the gift card or something to get a good review? Did they really get real reviews? Because reviews are for that purpose, to tell you the reality of what happened with a product. And then if it's not there, and it can be something as simple as that.

I mean, I've also— We've also seen that this has been an interesting part for you and I. We've had a client issue what they called gifts, and we found— and we had to re-advise that that actually was a misunderstood moment. Not by us, it was actually by somebody else that I don't— we don't know honestly what the truth of it is, but we had to go and help clean it up. And same thing goes with, you know, if you're, if you're not clear, kind of what you're saying, it's not clear enough. Mm-hmm. You could get yourself into trouble with the ethics behind 401(k) 401(k) if you don't really understand what is the timeframe for stuff like that, things like that. And I think it falls in line with what you're saying. It's like, is it too good to be true? Was it a little bit too easy? What are all the things? And it's hard to know that as a business owner. And that's where you have professionals in the field that assist with those types of things. But there, there has been a few moments where I've heard something and I'm like, oh, that's actually not right. And now I have to go fix it. It's going to cost you, unfortunately. This is a bad decision.

Yeah. I mean, there's— and I think of— I think when I worked with contractors, one of the things that they used to do would be like they got paid at the last couple of weeks of December, but they didn't cash the checks until January.

Oh, yeah.

Yeah.

It's a very gray area, but that was like a thing they did. Like, they would want to backdate sometimes, like their bills, which were dated in the next— trying to lower their tax exposure. And it's like, just don't do that. You're not doing anything other than kicking the can down the road when it comes to not putting the payments in. And then they didn't have the money available to them when they needed to pay their bills in January. To me, it was a dumb process, and it only works the one year. If you start to make it a habit, it's going to happen every single year. You're not doing anything year after year. Yeah. And I used to bug the crap out of me when people did that, just like, you earned it, you billed for it, put it in and pay the taxes. That's the way I looked at it. But that was a thing with a lot of the contractors that they would try to play games at the end of the year when they got paid by cash. Now today, most of the payments are electronic, so we don't see that too often. But yeah, it's kind of—

Look at the extra work we have to do right now for BOI, Lynda.

I know. I know.

Because of shell companies and all this crap. Yeah. Look at all of us. We're all beholden to this right at this time. I don't know if it's on or off. I can't remember now, but I think it's on.

But maybe by the time this airs, it'll be off again.

I mean, but that's the hardest part is it's always one person that ruins it for the rest of them. And you hear about, you know, well, gosh, what was the— we heard this, I think it was last year. Where a huge accounting firm wasn't paying the person's tax bills, or there was some— there was some thing going on, and it was a major music artist, I think it was. And I remember it being— Yeah, I remember that. Remember that? And it was just like, again, where is the oversight? Where do you see the transparency of what's happening? And I, I mean, those of us like that are working hard, like you said, authentically wanting to get the reviews, we are working hard. We are wanting to make sure we stay in the ethics and compliance and transparency. And I feel like it's the same the other way around. We'd like to work with people with that same value.

Yeah. And, and if you're working, if you're working with a client that you see things and you're like, this is just wrong, and you bring it to their attention, you highlight it, you explain why, and they continue to do it and you just don't feel feel like that's probably not a good client to stay, a good fit for you, if it makes you feel uneasy.

Yeah, yeah, so true. Do you remember we did have once where, um, because, you know, we, we've heard a lot about embezzlement in our line of work, and, um, remember once the— we had a client one time not do a full background check, or eventually the background check came later and they learned of this unfortunate circumstance surrounding this individual. And it was really a horrible moment, that feeling, that fear feeling. Felt bad.

You don't like to think of people in our industry as being so underhanded, but they exist, and it makes the industry look bad overall. And it makes it— if you've ever— and I have, I work for a client that came out of a bad situation where the bookkeeper did bad things. She ripped them off and then they installed, instituted a lot of different policy changes to make sure that it didn't happen again. And I was the unfortunate person to come in secondary. Yeah. Still my 25+ years, right? Still my client. But the, the, when I first started that feeling of they just didn't trust anything. How could they? And I'm new and you don't, they kind of knew me through, it was local. So it was like I could walk to the office where I would up in East Providence, and it was just kind of— I felt so bad for them because they were the nicest people. Like, how could you as a person come in, see this hardworking family-owned business, and then steal from them?

Yeah.

And sit every day within feet of the people you're ripping off day after day. That part breaks your heart. It really breaks your heart. And to see that that was happening. And then the guy couldn't retire because of that person. Because she stole $250,000 from them, which back then we're talking back in the early, late '80s, early '90s. It was a lot of money.

That's a lot of money.

A lot of money. Yeah.

Yeah. So I, to me, I mean, if, if our listeners are listening and they're in the accounting profession, it's just staying. And if you're already doing it, you're great. Awesome. Right. But it's just reminding yourself of the transparency and the, I mean, yes, it's complex. It's a lot of work. We're supposed to know a lot of answers when we really don't.

Yeah, we get asked a lot of questions that might not have anything to do with what we do. And it's interesting to see what you get asked. But I mean, just as simple as a client overdrawing the IOLTA account can be a big red flag trigger. And it can be done so innocently. We've had clients that it happened, you know, they came to us after it happened with a prior bookkeeper or whatever. It's not, it's not. And you know, when you work with somebody like that, they're in the middle of an audit because that's an automatic audit trigger.

Yeah.

Yeah.

That happened. Yeah.

You can tell as soon as we work with— I'm thinking of one client in particular. As soon as we work with them, you could tell this person was so ethically strong and was so embarrassed and didn't know what happened, didn't know why it happened and wanted it fixed. And obviously disengaged with this person and, you know, picked up the work with us. And you knew that this person was a good client because they were never— they never wanted that to happen. It was this— it was an honest mistake that happened, and that can happen with a trust getting, you know, moving money from one bank to another. It can happen very easily.

Absolutely.

Yeah. I mean, you have to know what you're doing when you're doing that, for sure.

Yeah. And that's the thing is, is if you know this industry and you understand it, because it happens not just in trust, it happens on the billing, Yeah, there's some complexity. That's another bad one. Yeah, there's a whole bunch. And so, yeah, it— but for those of us out there that are tenure like Lynda and I, we're doing it and we're steering with our hearts and minds to the north, the north star. Yes. Kudos to you all. But those that are new entering—

Mistakes happen. Mistakes happen. That's different than ethically doing something bad. Mistake is a mistake, and we're all human, and it can happen. I mean, it happens to the best of us. But it happens.

Yeah, exactly. So, yeah, I mean, this is an interesting topic to have. I'm curious. I want to go in the background later, you and I, challenge AI and ask a few.

Yeah.

Ask them what they would do.

See what it says. Right.

Yeah.

Like, what is it that it will— I'm not saying that it would be bad. I'm just curious.

Like, how would they handle this situation? That would be a a good fun test. Yeah. To see if it would handle it because it's not always right as we know.

Yeah. And how would you know? So, but—

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Well, well, I hope you stay warm. I hope I stay warm.

Thank you. I know. I really— gosh, I hope so. We—

We'll get through the winter.

Yesterday we, um, for my son's birthday, we tried something different. And when I walked into this place, it was like a go-kart racing, these really cool racing cars. And oh, it's freezing in there. It's like, can I—

Like that? That's not good. Can I wear my beanie?

But yeah, it was, it was a lot of fun.

Your baby grew up.

I know. This is the last of the teens. I'm really— kind of hit me hard last night, I'll be honest with you. But yeah, it's exciting. I'm excited for him. We had a fun day.

Good. That's good. You get to see him again too.

That's good. Yeah, it was good. Now it's probably going to be a long haul, right? Because you have Yeah. So anyways, this was fun. I'm glad we chatted about this. I think it's important to—

Yeah. If anybody's listening and they want to, like, send us a message or bring up a dilemma, bring it, bring it on.

We'll talk about it. Bring us a story.

Bring us a story. The names will be held to protect the innocent, but yes, bring us the story.

Definitely. All right. Bye-bye.

Thank you. Bye-bye.