The past 10 days has seen us dealing with a lot of challenges which come about through complex entities trying to be simple. Most of the challenges come from participants claiming they don’t understand but in reality it is they don’t want to pay the underlying cost of their organization structure.
The condominium association where the board didn’t want to address the interest charges to owners for financing a special assessment over 10 years. Their stated argument was that they were trying to keep it simple. The real issue was that they didn’t want to pay a manager or accountant money to track the owner accounts. Eight years later, they need to perform a new special assessment to come up with the shortfall that is owed the bank. This is going to be complex.
The investment partnership which wants to shift income between partners. They crafted a simple partnership agreement and right from the beginning started doing this. In the beginning they had lots of equity so the tax preparer was not worried about the unequal distributions. Five years later six of eight members have negative capital accounts and it needs to be fixed. They created a complex structure and thought a simple partnership agreement would allow them to do what they wanted. They didn’t understand. The truth is they didn’t want to pay someone to manage the complex modeling of the cash flow reallocation to ensure it was done correctly. It is their profit after all.
The Corporation who borrows money from the bank and then retires their majority shareholder. They write an agreement which says that the Company will repurchase 1/10th of the shares every year for the next 10 years. At a stated price. And then they fire the accountant who tells them they need to record a $5.0 Million debt – which of course puts them out of compliance with the bank. They find a more accommodating CPA to prepare the financial statement. Bank still finds out and calls the bank loans. They didn’t understand GAAP. No, the didn’t want to pay for effective advice.
Complexity has a price. If you don’t want to pay higher prices, keep it simple. There are no rules which say that profit can’t be distributed equally amongst all partners. Shockingly simple. There is no rule which says you can’t buy back the owners shares. But you should probably discuss that with the bank before you borrow money. And then talk with someone who knows what GAAP might have to say about that kind of transaction.
The old adage is very true: Pay me now or pay me more later. Alright I confess I added the more but it should have always been there. It is never cheaper to fix the problem later. NEVER.
There is another old saying: Accountants have the magic wand and attorneys have the way back machine. Notice though that you have to go to the true wizards of Oz to fix the problem. Accountant’s to create the numbers to correct the problem you created and the attorney to create the right paperwork at the right time. In hindsight.
Today is about clichés apparently. I believe it was Einstein who said, “A problem can never be solved by the same intellect which created it.” or something to that effect. What this means, in my world, is that the client goes to one accountant and lawyer to “be simple” and then fires them to find someone to fix the “complexity”. That means coming up to speed, understanding what you originally did, and then trying brainstorming for hours trying to come up with a plausible solution.
Yes, there is a better way. Plan for complexity. Accept that some modes of transacting business require new, or at least different, processes. Maybe new software; perhaps a new department; perhaps a new legal structure.
The entities above each spent under $2,500 to create the original simple way they wanted. Each has to be in excess of $20,000 to fix the problem. I don’t think planning to deal with complexity right up front would have cost anywhere near the cost to fix it.
Complexity. You will pay for it. The smarter play is to accept it upfront and make it a cost of being in business. Or don’t. You simply pay more to fix it.
Have a great weekend.
Accounting Clarity 