this post was submitted on 11 Nov 2023
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But I'm guessing you probably wouldn't think twice about an invoice for a contracted architecture firm for renovation plans, or a plumber's parts and labor for extensive work. It's not like accountants are inspecting all the invoices and checking the boss' private bathroom for signs of excessively expensive and gaudy taste. Especially if you're a contracted third party. Do you even technically need to be on the same continent?
Inspecting every invoice? No. Inspecting large invoices? Yes. Inspecting large invoices not related to cost-of-sales? Yes. For one of our larger clients, their annual audit took 75% of the accountancy staff, in addition to the auditing staff, because every invoice over a certain threshold had to be looked at.
And if I'd seen an invoice for extensive renovations where some of the parts purchased looked questionable (like a solid gold toilet), I absolutely wouldn't have taken that on faith as a genuine business expense that should be used to reduce profit, and would have questioned it. If there was a huge payment going out and no invoice to support it, I wouldn't have taken it on faith that was a business expense. While it would have been up to my boss at the time whether it was included, it would have been negligent of me to see a massive invoice for something obviously excessive and not raise a query about its validity.
And yes, if there were questions about whether something large and excessive had genuinely been installed in the office rather than the business owner's private home (and a gold toilet would invite questions like that), my boss would have asked to go and have a look before signing off on it being a business expense. And even then, if the gold toilet was in the business owner's work office, it would likely still have been considered personal expenditure when it's quite clearly excessive and quite clearly only for him personally. We have tax rules in this country that where a proportion of a business expense is determined to be personal in nature, it gets added back into the profit when the tax is calculated. While typically this is stuff like a business owner using the company van to run personal errands, or a farmer where part of the electricity and water use for the whole property applies to the living quarters (this is often estimated, like saying "5% of motor expenses, 10% of power and water, etc", but the principle is that if a percentage is personal not business, then it's not deductible for tax purposes), it would also apply to the inclusion of a gold toilet for personal use in an otherwise business-related office renovation.
Understood! Thanks for the detailed insight, I appreciate it. I have witnessed business excess but I'm not in the financial professions, so the exact mechanics of how they get away with it were somewhat opaque to me. Breaking it up into small invoices across multiple companies and payments makes perfect sense though.
It's also nice to know there are accountants who take this seriously enough to personally check.
No problem! :)
I think there genuinely is an issue where large businesses just aren't checked as thoroughly as small ones. It's much easier to check every invoice over X when there's only a few thousand invoices, compared to when there's millions or even hundreds of millions of invoices. There's also the fact that the value of X varies based on the size of the business. I had a few really tiny clients where X was 10, because for the size of the business and the revenue they did, 10 was significant. There were others where X was 1000. Obviously at both of those thresholds, a gold toilet is going to stick out - and for the tiny business, would probably also trigger a money laundering/fraud report (no accountant-client confidentiality when financial crimes are being committed. This is another area where the big firms are given a lot of leeway that small ones are not).
So I can definitely see how for a megacorporation, the auditor may well conclude that no invoice for less than 1,000,000 is worth the effort of looking at, and it becomes quite easy to start sneaking through those gold toilets on <1,000,000 invoices if you know the auditor isn't going to look at them.
As much as I have my doubts about AI, I think accountancy and audit is one of those professions where it could be a useful tool. If an AI could run through all the invoices and just flag the ones that look weird, regardless of value, for a human to take a closer look at, it would make a measurable difference - assuming a sufficiently unbiased and correctly trained AI, of course!