Managing a Business/Compilation Engagement Letter
"Hello, My boss is an elderly man who owns a small manufacturing company. I do his basic bookkeeping (A/P, A/R, Payroll). He recently hired his son-in-law (a CPA)to do his financials. He seems to be doing a lot of manipulating of the numbers and has changed several things such as converting from C Corp to S Corp, having the boss take his weekly pay via "loan to officer" rather than reporting the income through payroll, etc. Today I rec'd a Compilation Engagement Letter from him for the boss to sign, and a sentence stood out as bothersome for me. Can you tell me what this means: "management has elected to omit substantially all of the disclosures required by accounting principals generally accepted in the U.S.A." I am concerned that he is advising my boss how to "hide" things in his financials and that this sentence will protect the son-in-law in the event the boss gets exposed. Can you advise ?"
A reporting entity can choose the form of financial reports. In the case of a business which is owned by one person much of the detail that would be included in financial statements is unnecessary because it is designed to inform stakeholders who have no access to information.
An engagement letter which formerly appoints a CPA would normally be very specific about the terms of the appointment and such clauses would be normal and are not unusual.
If your employer follows the CPA advice in any matter this is a matter solely between them. There may be tax benefits from pursuing a particular course of action. Paying the principal through the payroll is not a course of action I would usually advise