Business records and discovery

The Pennsylvania Family Law Blog makes good points in OWNER, KNOW THY BUSINESS for anyone owing a business (and for spouses of business owners).

Rare is the instance where attorneys get to advise the client about how to handle the business records before they are sealed into reality by submission to taxing authorities or lenders. If we could, we would tell clients to sit down with their accountants and clean the books to reflect the economic reality of what really occurred. Nothing is more painful to a trial lawyer than to watch opposing counsel take their client apart, like removing the wings from a fly, as each bogus transaction and accounting game is exposed in excruciating detail before the Court.

Almost as bad is the client who has no understanding of how his or her business records work. A businessperson who does not understand how his or her records work looks stupid or dishonest or both. As attorneys we commonly make the mistake of assuming that clients understand accounting and tax law when they are not conversant with either. As a client, take a look at your tax returns and your financial statements as well as your books of original entry. If you don’t understand what you are looking at, it’s time to insist that your accountant step in.

If you enlist the services of an accountant, insist that the accountant play devil’s advocate. How will the other side look at the books? Is it time to cleanse the books rather than allow the opposing side to pick your books apart on their terms? Sadly, this may also mean that amended returns may need to be filed. But an amended return is better than a “tip” to the service from a presiding judge.

Above all, if you own your own small business or have an investment in one, don’t just let matters rest. Look at your books, your tax returns and your financial statements. Ideally, learn what they are about. You are the best advocate of their accuracy. But, if accounting is not your game, let the professionals do it and let them tell you where questions will arise.