A CEO explains why he needed a CPA instead of a public accountant, and a CPA explains the difference.
John Brown's 12-year-old company, Am/Pro Protective Agency, in Columbia, S.C., now generates annual revenues of more than $30 million by providing security guards to businesses nationwide. But during Am/Pro's first three years, the company was nearly driven out of business by misguided financial advice from a person Brown believed to be a certified public accountant. "We were looking for ways to control costs, and since this person was affordable and told us he was a CPA, we just trusted him."
That was Brown's first mistake. The second and more damaging error was following the cash-flow strategy his "CPA" recommended: "He basically wanted us to 'float the system,' which boiled down to not paying federal taxes for a while. He advised us that as long as we were paying state and local payroll taxes, we wouldn't get into trouble."
The strategy landed Brown in so much trouble that it's a wonder his company survived. "We had been using money that should have gone to pay taxes to cover payroll instead." Then the IRS came in with an assessment of $25,000 in overdue taxes, plus back-interest charges and penalties. Brown was in a panic. "I couldn't just tell our banker we needed a new loan because we hadn't been paying our taxes."
Brown turned instead to one of Am/Pro's investors. "He decided to investigate our CPA and found out that he was just an accountant passing himself off as a CPA." Because the investor believed in Am/Pro's long-term prospects, he helped Brown make his overdue tax payments and hire a CPA with experience at one of the Big Six firms.
Since then, says Brown, "we've developed a system in which our internal CPA now handles our weekly and monthly financial reports and conducts an internal semiannual audit." When Am/Pro reached $20 million in sales, it also hired Price Waterhouse as its outside accounting firm for tax advice and an annual independent audit. "We had one unannounced audit by the IRS just two years ago and came through with flying colors," Brown says proudly.
For business owners who are confused about the difference between public accountants and CPAs, here's a basic primer from Carol Riehl, assistant regional director of accounting and auditing at Grant Thornton in Chicago.
· Certified public accountants must pass a rigorous exam that tests their knowledge of accounting and tax principles, auditing standards, and business law. Certified at the state level, they must keep up with continuing-education requirements and adhere to a strict code of ethics.
· Public accountants are generally trained in accounting and business principles, but since they are not regulated by the state, there are no guarantees about their educational background or ethical standards.
John Brown's experience notwithstanding, there's no reason to assume that relying on a public accountant's advice will land your company in hot water with the IRS. But it does make sense for fast-growing companies to invest early in the best-quality financial team they can find. Riehl suggests a good compromise: "Hire an accountant to handle internal matters such as collection, record keeping, and generating monthly or weekly financial reports. But rely on an outside CPA firm for tax advice and reports, audits, and general supervision of your internal accounting systems." For more tips, get a free copy of the brochure How to Choose and Use a CPA from the American Institute of Certified Public Accountants, Communications Division, 1211 Avenue of the Americas, New York, NY 10036-8775.