Meeting with a potential investor

[tacks]

Question:

What would a CPA need before approaching a client's potential investor/partner with UNSIGNED sales schedules, partial records and honest opinion? Would written permission from client's Corp Officer be sufficient?

[I wouldn't imagine that a 2848 would be appropriate]


Background:

Client's 1120 S is not close to being started (let alone being completed, reviewed and signed). So the plan is that the CPA will approach investor with a sales schedule, bank records, a "work in progress draft of the 1120 S," prior year's 1120, a projection of profit and his verbal honest opinion of what he's seen.

[NONE of this will be signed except for the 2009 1120 S]


thanks very much

Side note: The client(s) are good at what they do & have become profitable. But they are horribly disorganized as business people. It's as if the bookeeper, Officer, and other 50% shareholder have never met each other.

I greatly appreciate the help given on this issue:

http://www.thetaxbook.com/forums/showthread.php?t=16904

But the shareholder did a horrendous job of explaining. As I wasn't ever going to need to give an 1120 S to a bank.

[erchess]

I wouldn't touch this with a stick

1. I would not meet with or speak on the phone to someone who is considering loaning to or investing in a client.

2. I would not part with my work product which wasn't part of the package given to a client upon completion of return. I wouldn't give it to the client nor to the bank or other lender or investor.

3. I would not let anyone see let alone have a copy of a return or other document which I knew to be unfinished.

4. The sum total that I will do by way of communicating with someone who is considering a loan to or investment in a client is to write a letter. "I have prepared forms whatever for whomever for lo these many years based entirely upon records and representations given to me by client name. I have not audited these records and often I have relied on client generated summaries of records rather than the records themselves. I have no opinion as to the creditworthiness or financial soundness of this person or business and I would suggest that you look to other sources in determining whether to invest your money in whatever."

The thing you have to realize is that the potential lender or investor is looking for someone to be able to sue if money is lent or invested and then lost. There's absolutely no reason I can see why a tax professional should stick a neck out like that.

[tacks]

thanks for the response

much appreciated

[Koss]

Dark Worldview

While I understand erchess's position, and I respect his opinion, I think my own approach would be more of a case-by-case basis.

I'm not a CPA. Even if I was, I would shy away from writing anything other than, as suggested by erchess, something to verify that I had prepared tax returns for the client.

But meeting face-to-face with a potential investor or private lender, with the client present, or with the client on speakerphone, or with the client's written permission, to review tax returns or other books and records, and help the lender/investor understand them or interpret them, to me, doesn't seem to be entirely out of the question.

I see two different issues:

(1) The client may not be able to explain their tax returns or other documents to the investor's satisfaction. The client is good at brewing craft beer/running a restaurant/fixing furnaces/whatever. He doesn't know what depreciation IS. The lender/investor wants someone who speaks their language, who can answer basic questions about the books and records. Who better than the guy who prepared the tax returns? It's not an unreasonable request from the client. And you can charge the client for your time.

(2) While I don't necessarily agree that every lender/investor is looking for "someone to be able to sue" if the investment goes bad, there is a valid question about the extent to which the lender/investor is relying on the tax pro's interpretation, or verification, or explanation of the tax returns or other records.

It has to be made clear to the lender/investor that the tax pro is not performing some sort of independent, third-party verification, or audit, if you like that term. In fact, it has to be made clear that the tax pro is not a neutral third party. The tax pro got paid by the client to do the tax returns, and is now getting paid by the client to spend time explaining them to the investor. The tax pro should probably disclose this, in writing, to the investor, in order to make it clear that the tax pro is not protecting the interests of the investor. Quite to the contrary, the tax pro's own interest is in maintaining a relationship with the client. Thus, the tax pro's interest could easily be viewed as being in conflict with the interest of the lender/investor.

As long is this is clearly disclosed, I'm not sure there's a problem with sitting down with a potential investor to explain how you prepared the client's tax return, and what certain line entries mean.

Think of yourself as an expert witness. You're getting paid by one party, but you're still going to answer questions for the other party or their counsel. When you do that, everyone knows that you're getting paid by the party that retained you, so there is at least a perception of an inherent bias, and it is fully disclosed.

Yes, I know, it's not a lawsuit or an adversarial proceeding. But I think the analogy works, to a certain degree. The other party can hire their own expert--if they choose to do so.

The lender/investor needs to be encouraged, in writing, to bring in their accountant. But as long as you do that, it may be okay to answer a few questions about the tax returns.

BMK

[taxmandan]

I agree completely with erchess. Koss says 'The lender/investor wants someone who speaks their language, who can answer basic questions about the books and records.' But that's assuming (and we know what that means) that the investor knows and understands the language of accounting and taxation, which is a very big stretch IMO. And a face to face discussion will really put the CPA in legal jeopardy since no one will agree about what was said and what was meant, even if everyone took notes. About the most I would consider would be a written response to written questions from the investor regarding the preparation of the tax return with disclaimers as stated earlier.

[erchess]

written answers to written questions

I wouldn't mind doing that with the disclaimer I mentioned and the disclaimer that the investor or lender should involve their tax professional.