The Role of Accountants

Terms:

Depreciation:
Depreciation is a process – allowed both by the IRS and GAAP, though to different degrees – for a firm to deduct, for tax purposes, losses in value that affect a corporation. Normally, one can only claim a “loss” for tax purposes when one actually sells an asset at a lower price than that at which one bought it. However, the process of “depreciation” allows a firm to reassess its value during every year. The company can then claim a “loss” of the difference in value between the previous year and the value of the company as of this year. The lower value that has been used to claim the loss then becomes the “recomputed” basis for the company for the purposes of any future sale (i.e., if the property is sold, that value would be the cost basis for determining capital gains tax). See 26 USCS § 1245.

Accounting Controls:
In addition to monitoring a company’s books, a company’s accountants will also monitor the way a company reports and processes its financial transactions in order to ensure honesty in the process. When a company engages in such activity, this is known as placing financial or accounting controls over the firm’s accounting processes.

Overview to Accountants and Accounting

Accountants play the role of keeping track of an individual's or company’s finances. In many cases, the accountant also handles the filing of the company’s tax returns.

In the context of a corporation, accountants play a very strong role, not only in the management of the firm’s books and records, but, oftentimes, also in the management of the firm’s business as well. Moreover, accounting concerns can have a serious impact on the way that the company’s lawyers approach transactions by and between businesses. Thus, understanding the role that accountants play in a company and how they relate to legal professionals is an important matter.

The Role of Accountants in a Corporation

Typically, any business entity apart from a sole proprietorship is likely to have an accountant (and sole proprietorships often have accountants as well). In some instances, mid to large size companies may assign accounting functions to their internal staff and employ an outside accountant or accounting firm as well. In any case, it is rare that a firm’s management fails to interact with accountants on a fairly regular basis.

In the case of internal business functions, an accountant plays a variety of roles. First, an accountant will be responsible for keeping track of a firm’s finances during its normal transaction of business. When a company sells a product, buys a piece of equipment, or enters into a merger transaction, an accountant will be present.

Foremost in an accountant’s list of responsibilities is the duty to keep track of a company’s intakes and outflows of cash. The “intakes” of cash are dollars that the firm receives either from the sale of goods or services or from the taking on of corporate loans, such as bank notes.

A second critical function served by accountants is the preparation of the firm’s financial statements. In the case of a private entity, the annual (or semi-annual or even quarterly) production of financial statements is an informational process that provides data to the firm’s management as to how their business deals are performing. In the case of a public company, the preparation and dissemination of financial statements is a process that is heavily regulated by the FASB and the SEC. See 15 USCS § 78m, 15 USCS § 78t and 15 USCS § 78q. Accountants are required to compile financial data in compliance with the generally accepted accounting principles and to distribute that information to shareholders and investors in an organized fashion. See SEC v. General Refractories Co., 400 F. Supp. 1248 (D.D.C. 1975).

A third key role of accountants in a company is the preparation of the firm’s taxes. Typically, a company will have a fairly complicated tax structure which calls for the taxing of its income, the deduction of its expenses, and the calculation and exclusion of certain items of depreciation. In the end, it is the rare corporate director or manager who can handle all of these financial computations on his or her own. As such, these tasks often fall to the company’s accountants who handle the preparation of the firm’s taxes and ensure that the taxes are properly filed and paid.

Finally, accountants play a variety of roles in the structuring of corporate transactions and deals. It is not uncommon that, in the process of undergoing a merger or major asset purchase, the firm will consult with their accountants in order to determine the most beneficial way of preparing and executing the deal. Ultimately, the goal of this process is to ensure that the contemplated transaction makes fundamental accounting sense – as the company’s books will be available to shareholders (or partners or members) and will be reflected in the company’s market valuation. In addition, such transaction structuring is essential for the creation of the most tax efficient means to save the company money on its tax bill.

EXAMPLE: Control Co., a publicly traded firm, was considering a corporate merger. However, it was concerned about several key accounting issues. First, it wanted to assure itself that its corporate books were accurate and that it fairly represented the financial health of the company. In addition, it wanted to structure the transaction in such a way that the firm would still be able to utilize operating losses that it had sustained in several divisions of the company to offset gains in divisions of the other company that Control was merging with. To help it deal with these situations, the firm contacted its accountants and consulted with them throughout the structuring of the transaction.

Interactions between Lawyers and Accountants

Given the roles described above that accountants play in a firm, it should not be surprising that lawyers and accountants often interact on a variety of levels. Attorneys and accountants help a firm make the decisions that involve interpreting the many rules created for the proper reporting of financial information. Tax attorneys work with accountants to help a firm prepare and file its taxes in a fashion that complies with the many rules and regulations provided by the IRS, and helps with the interpretation of the many legal precedents that the courts have created in the tax accounting field.

Perhaps the most important interaction between attorneys and accountants occurs in cases where the firm is structuring a major investment or merger transaction. In such situations, the interaction between lawyers and accountants may be pivotal in ensuring that a deal runs smoothly and provides the intended results that the firm anticipates. When structuring a deal, attorneys and accountants act in concert in order to predict the outcome of the transaction and try to avoid the many ways in which the firm could potentially find itself in legal or financial difficulties as a result of the transaction.

For these reasons, the best way to characterize the relationship between lawyers and accountants is as both preventative and reactionary. Lawyers work with accountants in order to protect the firm from pitfalls that may result from the improper reporting of financial information – either to shareholders or to the IRS. Additionally, attorneys confer with accountants to ensure that the firm garners the full range of benefits that it hopes for as a result of any major transaction that it engages in.

Lawyers and attorneys will also consult when a firm has gotten itself into trouble – with the IRS, SEC, or shareholders – as a result of the false reporting or under-reporting of financial information to any of these groups. Additionally, attorneys and accountants will be called upon to do “damage control” in situations where buyers and sellers of company assets have made deals that have turned out to be financially or legally unsound.