Every business needs a qualified financial expert to oversee accounting processes. Whether you’re a one-person company or you have 10 or more employees, managing activities like payroll, insurance and sales tax can be overwhelming if you have to do it all yourself.
For regular month-to-month financial records, it’s usually good enough to use a bookkeeper or accountant trained in Generally Accepted Accounting Principles (GAAP). In some situations, however, you might need a higher level of expertise, and that’s when you should consider using a certified public accountant (CPA).
What Is a Certified Public Accountant?
The certified public accountant definition is that of an accounting professional who has studied for and passed the Uniform CPA exam set by the American Institute of CPAs (AICPA). The organization is the world’s largest association of accountants, and the CPA exam comprises four 4-hour sections. To become CPAs, candidates must pass all four sections within 18 months, earning a score of at least 75 for each section.
All 50 states have different CPA education, experience and licensing criteria, so candidates also have to fulfill the specific requirements of the state in which they apply. Once a CPA qualifies, he or she can act in the role of a tax consultant, accountant, auditor and business or financial advisor.
Although the licensing only authorizes them to act in the state that issued the license, CPAs can take advantage of reciprocity laws to become licensed to operate in other states. The CPA designation is a popular credential in the accounting world, and holders have to maintain their status to go on working.
What Do Certified Public Accountants Do?
Certified public accountant services aren’t used exclusively by large corporations and software companies with millions in venture capital funding. CPAs do many things, including working for small neighborhood businesses and public accounting firms.
A CPA can provide you with advice on tax issues, accounting setup and business financial planning. He or she can prepare and verify financial documents, analyze budgets, file taxes and advise you on issues such as securing a business loan.
CPAs usually specialize in an aspect of accounting, such as internal or external audit and tax planning, preparation and returns. Unlike other practitioners, a CPA is qualified to represent a client in tax court.
An internal audit is an important business tool to assess how well your company is performing financially. This helps you to manage risk and identify areas where you need to improve efficiencies. Internal auditing is also valuable to ensure the security of your information and your compliance with financial regulations.
A CPA is qualified to handle an internal audit, which includes:
- Examining, analyzing and calculating your business’s level of risk and controls
- Evaluating the company’s compliance with federal and state policies and laws
- Making suggestions to the company’s owners or executive team on how to improve profitability.
By conducting internal audits regularly using a CPA, you can make sure your company remains in compliance and that all parts of the business are operating effectively and securely.
External auditing is when an independent professional accountant examines your financial records and certifies whether they are prepared correctly. Auditing firms use CPAs to handle external client audits, which helps to keep the process impartial and trustworthy. The audit includes making sure the company’s internal controls are effective, that the accounting records are complete and they fairly represent the company’s financial situation.
The CPA also determines whether the policies and procedures the business uses are adequate and comply with government standards, and the financial statements are accurately reported and error-free. Positive external audit records are important tools for potential investors, lenders, suppliers and creditors.
Checking for Fraud
An external audit might also target particular concerns regarding accounting records, such as investigating the possibility of accounting fraud. This is when accounting records are deliberately adjusted to make your financial position appear better than it is. Some examples of this are:
- Combining your short- and long-term debts into a single amount, which makes your company appear more liquid than it is
- Leaving out references to any risky investments or “creative” accounting practices
- Over-recording sales income or under-representing the expenses to make profitability look better.
Well-known instances of fraud over the years include Freddie Mac’s understatement of earnings and the case of Xerox, which falsified its financial records over a 5-year period to show its income as $1.5 billion higher than it was. In 2008, Lehmann Brothers went bankrupt after hiding more than $50 billion in loans by disguising it as sales. Most recently, the Securities and Exchange Commission (SEC) charged an Indianapolis truckload freight company in April 2019 with trying to hide losses of $20 million from its investors.
Tax Preparation and Filing
If a regular accountant or tax practitioner can prepare and file your small business taxes, why should you consider using a CPA to do it? For several reasons, actually.
- Licensing: A practicing CPA is licensed through the state in which they operate. To keep their license current, they have to take courses on the latest changes to tax regulations and practice according to required standards. This gives you the benefit of getting a credible, quality service from a legitimate and recognized provider.
- Consistency: As with any other profession, accountants may move around. Today the person you use is handling taxes, but tomorrow he or she might have joined a company as a financial officer. When you use an independent CPA, your chances are good they will still be practicing year after year.
- Extended Services: An accountant may do a great job with your tax preparation, but many of them close their doors from May to December. What happens if you receive an IRS audit letter? This is a traumatic scenario for any small business owner. It’s comforting to know your CPA is available year-round to answer questions and help you with business tax planning that can save you hundreds in tax dollars—and even represent you in court if required.
Most people don’t need a CPA’s help for simple and individual tax filings. But if you have a complex raft of investments or want to optimize your business savings, this is the way to go.
What Can a CPA Do That an Accountant Can’t?
It’s often said that while all CPAs are accountants, not all accountants are CPAs. Some of the main things a CPA can do that an accountant can’t do are:
Conduct Audits and Reviews
While anyone with the training and knowledge can conduct an audit or review, only a CPA can sign off on and issue the reports for these activities. Companies provide financial statements along with a CPA’s report to lenders, investors, suppliers and customers.
The audit is the highest level of financial statement the CPA can provide. Its purpose is to provide a trustworthy opinion that the business is liquid and managed correctly.
Act as a Fiduciary
CPAs are recognized as fiduciaries, which means they have a legal duty and power to act on behalf of their clients. They are also bound by law to operate in the best interest of their clients, while non-CPA accountants are not considered to be fiduciaries to their clients. They are expected to comply with a strict code of ethics and to meet the standards set by their profession.
Represent You in Tax Court
Your non-CPA accountant might prepare a good tax return, but they aren’t eligible to represent you before the IRS. When you have to appear on a tax-related matter, you can either represent yourself or choose someone to represent you who is admitted to practice before the Tax Court. People who fall into this category include tax lawyers and licensed CPAs.
Where Can You Find a Certified Public Accountant?
Finding a CPA to handle your financial affairs can be as simple as using Google to research all the CPA firms in your immediate area. The AICPA has a certified public accountant directory that is searchable by clicking on a map of the United States. Many states have their directories, too, such as the Florida Institute of CPAs or the Michigan Institute of CPAs. It’s also helpful to ask business connections for recommendations because this can help you find a CPA who knows your industry well.
The Bottom Line
Business owners can benefit from using a CPA for almost any financial matter. Even if this seems like an extra expense, you could end up facing much higher costs if your choice of an accountant is unwise. Also, if your tax filing leads to a request for an audit or you become the victim of financial fraud, bringing in a CPA to help you is an additional cost on top of your regular accounting fees. At the very least, having a CPA in your corner is likely to increase confidence in your business, which can benefit your dealings with lenders, customers and suppliers alike.