Bookkeeping Ethics and When to Push Back on Client Requests

When clients cross the line, how do you hold yours? Bookkeeping isn’t about keeping quiet, it’s about keeping standards. Our favorite Bookkeeping Mensch, Paul Rosenblum, answers a listener’s fan mail about a newer bookkeeper, Katie, whos is struggling with some issues related to this distinction. It’s a full-on masterclass in bookkeeping confidence. Topics covered include the ethical heart of bookkeeping, the importance of documentation, and why saying “no” is sometimes the most professional thing you can do. Along the way, he shares stories from decades in the field, a few tax tips, and a clear reminder that bookkeeping isn’t data entry, it’s responsibility, accuracy, and boundaries.

Sound effect: https://freesound.org/people/metalfortress/sounds/611788/

Transcript

Season 6 Episode 6

It has gotten very busy for me recently, and my ‘end of year’ adrenaline that I have spoken about before is beginning to kick in. Not every hour of every day, but I can feel it at times during the day starting to run through my body. I am starting to feel the pressure of the first workday in Jan and knowing that I have 1099’s to do, after all the bookkeeping for all of my clients are done for 2025 (at least on the expense side of things). So, I am working hard in cleanup jobs, and regular monthly bookkeeping, prioritizing carefully as I go.  I take breaks during the day to check your emails to Bookkeepermensch@gmail, as well as keeping up on my regular email and read and answer anything that I have to during that workday.

  And the other day, I checked email and there was a notice of “Fan Mail:” that a listener sent in.  As I have announced, the Q&A season will be starting soon, but the question that I received is such an important one, and is at the crux of what bookkeeping is in my opinion, along with relationships from the bookkeeper to the clients, that I decided to answer this question in full detail in this one episode. So, let me turn up my passion for this subject.  This will be an educational episode for bookkeepers, and maybe an eye-opening episode for some small businesspeople who think of their bookkeepers as ‘data entry’ people that I’ve talked about before. 

  Because the listener did not leave voicemail, my “Podcast Production and Growth” guru and what I call my Producer, Steph, is going to play ‘the part’ of Katie, the listener who wrote the fan mail.  A special thanks to Katie for asking this and writing it so well.  And here we go --   I’m Paul Rosenblum. 

Here's Katie – (channeled through Steph) – The mic is yours! 

First of all, welcome to the bookkeeping world, Katie.  Glad to have you!  There’s more than one way to answer these questions.  There are factual answers, and then there are philosophical answers.  Don’t worry, I won’t get too deep on the second one.  

As an independent bookkeeper, I, most of the time, know when a client is telling me that something is a business expense that really is a personal expense and not deductible in the company’s taxes. This comes together with something that I have been talking about for a couple of years now -- relationships with clients. The more you know personally about your clients, the more you can pick out the personal expenses from the business expenses. The bookkeeper just has to ‘pay attention’. ((and by the way… Can A.I. do that???) 

For one example, I have a client who lives in Indiana, so when I see expenses from there, they are probably personal expenses, but not 100% -- I do ask. 

When I used to meet face to face with new clients (and now face to face on Zoom calls), I set the ground rules. I want every one of my clients to understand how I work, how much passion I have to get things right, and to understand the relationship that a bookkeeper has with a client and with their tax preparer.  I will tell the client that I will enter every transaction, even if I have to look things up to see what kind of store, website, or service that they purchased to see where that transaction should be recorded in the chart of accounts in the books of the company.  At the end of each month, I will also send them a spreadsheet of all the transactions that I wasn’t sure of. 

 In your case, Katie, the client says that they have many vehicles that they use for business.  The first thing that I’d ask (as a bookkeeper, and I would ask strictly for business purposes so that I can do my job properly), is for all of the paperwork on the purchase or leases of every vehicle that they claim is being used for the business.  I tell them that leases and purchases are dealt with differently in business, and they can actually save money on taxes if these vehicles are properly input in the accounting system.  Once you get the paperwork, you will see how many leased vehicles, and how many purchased vehicles the company has. You will also see who the paperwork of the leases or purchases are made out to. If everything is in the businesses name, then the purchased vehicles will be Assets, and the leased vehicles would be expenses. And even the model of the vehicle could get an additional depreciation expense if it’s purchased by the business. That can save more money for the taxpayer.  

 If, however, the vehicles are in the owners’ personal name, the deductions are figured out by the tax preparer in a very different way.  It could be figured out as a percentage of total expenses for said vehicle(s), so if it’s 80% used for business and 20% personal, then every $100.00 spent on gas would be split between the business and the personal vehicle expenses, which would be an “other” expense.  $80.00 would be a business expense, and $20.00 would be a personal vehicle expense. Or the total vehicle expense of a non-business owned or leased vehicle would be adjusted just once at the end of the year by an adjusting journal entry. The other way is based on mileage.  For each personal car, the client has to keep a careful mileage log and based on that mileage, the IRS will allow the business to pay the owner nontaxable money based on the total mileage for the year. So, getting the paperwork from the client let’s them know that you know what you are doing, and also that you want to do things the right way. It would say a lot about a client if they don’t want to give you the paperwork.  At that point, you would have a right to walk away citing that you have a reputation to uphold.  Family friend or not, they are paying you to do their bookkeeping. Not just data entry.  Bookkeeping.  This is why it’s so important for bookkeepers to know something about taxes so that they (we) can book these transactions properly for the tax preparer.  

So, one answer is that you, as a bookkeeper, can push the client (or family friend) and let them know that you want to do things properly. But here is where it can get tricky.  The tax return that the tax preparer submits to the IRS is the tax return for the client. We, as bookkeepers, don’t sign it. Hence, no legal liability, unless the bookkeeper themselves commits fraud. The taxpayer and the tax preparer sign it.  If there is any fraud on the tax return and the tax preparer doesn’t know about it, then they are safe. If the client (or the bookkeeper for that matter) tell the tax preparer that there are personal expenses in the books and the tax preparer leaves them as is, then if they are ever questioned during an audit at the IRS, it could cause a problem for them if they tell the truth. It puts them in a difficult position.

  So, one way of handling this situation is the entries that you are entering as business expenses directed by the client, you can copy and paste a “memo” or “Description” in each transaction that says “Per Client” in it. This takes all the pressure off of you, if ever looked at by the IRS during an audit. If the tax preparer goes through detailed reports, they will see that, and then it would fall to them to talk to the client about moving these transactions, or not, in many cases. There are many accountants who will question the bookkeeper, and if we tell them that they are personal expenses, the tax preparer will adjust and remove them from a deductible expense even without telling the client. And the client will probably never know. But us professionals sleep better just knowing that it was done right.  But at least, you are out in the open about it.  I have done that from time to time with difficult clients who just insist that what I know are personal expenses they want in the books as business expenses.  

The other way of dealing with transactions like these is to confront the client. Let them know that part of your job is to protect them from audits. An audit might cost $1,000.00 a day just for the tax preparer to represent them at the IRS offices. There are so many other ways to save money 100% legally just by using the IRS code that we don’t have to cheat with a few hundred dollars of gas for vehicles, for one example. I have told clients that I will not count certain transactions as business transactions if I know that they should be counted as a “draw” or “distributions” within the company. 

***Tax Tip***

It's a very different situation if you are an employee of a company receiving a W2 at the end of the year.   Your employer has the right to tell you what to do and how to do it. But as a subcontractor, you are (or should be) treated as a business. The same as any service-based business.  If you need a plumber, you don’t tell the plumber how you want the pipe fixed -- you just want it fixed properly.  There is no difference with bookkeeping. So, as a subcontractor, you are the one who is in control of how accurate the bookkeeping is – not the client.  Then, let the tax preparer do their thing.  Now, we all have a different style, but I will explain just that to every new client who I start with.  I tell them that they are the bosses of their companies, but I’m the boss of the bookkeeping (which usually gets a smile if not a full laugh). I’m here to take the pressure off of them and to do the bookkeeping properly.  That’s why they hired me, or any bookkeeper. If they push back at that, I know that I should not take them on as a client. 

You can probably tell that I’m pretty passionate about this subject. I knew that I needed to know more than the client does about bookkeeping and taxes from the very beginning of my career. At the beginning, I was a small step ahead, and now I’m about 3 ½ miles ahead of my clients. So, if I get pushbacks from a client about how to categorize something, after 30 years, I can threaten to walk away from them and their businesses because I still have an overflow of clients, although not as much as I once did. In your case, Katie, I’d be friendly and professional but let them know that you want to do things properly, and they need to work with you and not against you.  You are both on the same team.  They might just thank you later.

And now – for this episode’s ‘Tax Tip’. This is the time of year that people start a new business or create a new entity.  If you want to create an S-Corp, keep in mind that when you create a corporation, it is with the state.  It defaults to a C-Corp.  So, to let the IRS know that you are filing as an S-Corporation, you have to file the IRS form 2553 to elect to file the C-Corp as an S-Corp.  Allow at least 2 months for the IRS to approve, although it could take much less time.  And now, back to today’s episode.

Now, the second part of Katie’s question:  

At the end of every month, I will send the client a spreadsheet of all the transactions that I don’t know how to categorize. I create a column for them to type in their answers.  

Starting around now in November, I will start to send profit and loss detail spreadsheets for the entire year (if small enough) or month by month, as to not overwhelm the client with too much data.  I will have them take a look at all the categories, all the transactions in those categories, and then, for as many clients as I can, get them to send me an email ‘approving’ of all the categories and where the expenses are booked. If they want any expenses moved to another category, if they make sense tax wise, then I will make those changes.  If I have a payment in a COGS – Subcontracted Expense account, for an example, and the client would like that transactions to be in Advertising expense since that subcontractor is a marketing person, then, yes, it makes sense and the tax deduction either way is 100%.  But if they want a subcontractor to be moved to an expense that makes no sense during a possible audit, then I will tell them that I won’t move it for possible audit reasons.

--   I always tell all clients to keep receipts in case they do get audited, but I don’t need to see them personally.  If I were working at their business physically, then yes, but the logistics in getting every receipt to me to do the bookkeeping from is very time consuming. I do explain to the client that the tax return belongs to them, and the answers that they give me when I ask questions, should match the receipt that they save either on their computer, on the cloud or by binder clipping the paper receipts together with the bank or credit card statements. 

“Bugging” your new client about transactions, in my view, is just letting the client know that you are passionate about getting it right. I’ve said it before, and I’ll say it again now -- Bookkeeping is not just ‘data entry’.  It’s bookkeeping.  (Double 0, double K, double E). 

The first year with a client, I “Bug” them a lot, as I explain to them that after the first year, and I see the pattern for the previous year, moving forward should be much easier.  And it usually is. And yes, Walmart, Target, Macy’s, and even the 99 cent stores could be one of many categories in your chart of accounts. So, yes, you must ask.  I do the bookkeeping from credit card statements and from bank statements (hence, I don’t need physical receipts unless it’s a big purchase or a loan or an Affirm payment which I talked about on the last Q&A episode).  This is why there is much back and forth between us questioning transactions, at least for the first year.  Always some back and forth, but much less in year #2 and year #3 and moving forward. 

A good bookkeeper, in my opinion, should probably be a ‘Type A’ personality. Friendly, but strong. Bookkeepers should be in control of things. Our job is to prepare books that are as clean as possible for the tax preparer. 95% of my clients are single member LLCs with no payroll. So, payroll is only a small issue for me, and when it does come up, I’ll mostly leave that to the tax preparer-- which is why I concentrate on the tax-based issues. I don’t make decisions on distributions vs shareholder loans for S Corps, for example. That’s up to the tax preparer-- him or her. However, the profit and loss, for me, is #1 on the priority list.

  Then I go through the balance sheet.  Fixed assets are the most important, so that they are set up properly to be depreciated by the tax preparer in whatever methods that are available in that particular tax year, and then I make sure that all balances on the loans that the client owes are all correct.  If they don’t, something on the profit and loss might not be correct, since they are related. (loan interest is one of them)

This whole process also depends on whether the client ever even looks at their books. Some of my clients never look at their books -- they just look at their bank accounts.  The books are for the tax preparer, so that’s when us bookkeepers need to not only have an open dialogue with the client but with the tax preparer as well. 

These are decisions that each bookkeeper has to make for themselves.  How are you going to deal with clients who think they know more than you, and how do you deal with clients who just want to do things their way, even though they hire you and pay you as a subcontracted service. How do you deal with clients who want to enter transactions in the books and still call you, their bookkeeper?  Online accounting opens up questions like those. I’m their bookkeeper or I’m not. I don’t share well or play with others well.  (I never did, so why start now)?  My rules as a bookkeeper.  This is what I am paid for.  If a client wants to move on and work with someone else, that’s ok with me.  I say this because, Katie, you are a beginning bookkeeper.  Think about these ethical and business questions at the beginning of your bookkeeping career.  Moving forward will be smoother, and the foundation of your reputation will be solid.  

Since I was interrupted all day today with phone calls, meetings, and podcast work, I’m going to ‘smoothly’ start doing some work and get some bookkeeping done! 

I’d love to hear back from you Katie, but remember, please include your email!  

And a thank you to Steph for playing Katie’s part today, and for everything else she does for me and this podcast.  

I’m Paul Rosenblum