Why Most Accounting Policies Don’t Work (And What to Do Instead)
Key Concept
Your books balance. Your bank reconciles. Your CPA files your return on time. So why do problems keep surfacing?
The Core Insight: Balanced ≠ Tax Ready. A file that balances can still hide missing documentation, wrong categorization, policy violations, and audit risks.
Figures (Full Resolution)
Figure 3.1: Balanced vs. Tax Ready
The gap between “balanced” and “Tax Ready” – showing what balance catches (20%) vs. what actually matters for tax and audit readiness (100%).
Downloadable Resources
Checklists & Assessments
- Balanced vs. Tax Ready Comparison Chart (PDF) – Visual comparison of what each standard catches
- Invoice Documentation Checklist (PDF) – What every invoice needs before payment
- Warning Signs Self-Assessment (PDF) – 15 red flags in your current books
The Three Questions Worksheet
For every transaction, ask: 1. What was bought? (Category/account) 2. Why was it bought? (Business purpose) 3. How is it documented? (Receipt/substantiation)
Download The Three Questions Worksheet (PDF)
Why Traditional Policies Fail
The Four Failure Modes
| Failure Mode | What Happens | Result |
|---|---|---|
| Memory-dependent | “We always do it this way” – but who remembers? | Inconsistent execution |
| Binder-bound | Policy exists but no one reads it | Zero enforcement |
| Human-checked | Someone is supposed to verify | Errors slip through when busy |
| Periodic review | Problems found months later | Expensive cleanup |
The Real Cost of Messy Books
Visible Costs: – Premium rates for year-end cleanup ($150-300/hour vs. $50-75/hour ongoing) – Penalties for missing 1099s ($60-$310 per form) – Interest on underpaid estimated taxes
Invisible Costs: – Missed deductions (average business misses 15-25% of legitimate deductions) – Higher interest rates on loans (lenders see disorganization as risk) – Lower valuation at sale (buyers discount for “accounting uncertainty”) – Owner time spent explaining, reconstructing, defending
What Balance Can vs. Can’t Detect
Balance WILL Catch:
- ✅ Math errors (debits ≠ credits)
- ✅ Missing transactions (if bank doesn’t reconcile)
- ✅ Duplicate entries (obvious ones)
Balance WON’T Catch:
- ❌ Wrong categorization (expense in wrong account)
- ❌ Missing documentation (no receipt attached)
- ❌ Policy violations (payment without approval)
- ❌ Compliance gaps (1099 vendor missing W-9)
- ❌ Fraud indicators (ghost vendors, unusual patterns)
- ❌ Tax optimization opportunities (missed deductions)
Warning Signs Checklist
Answer YES or NO to each:
Category 1: Documentation
Do transactions have receipts attached?
Is business purpose documented for meals/travel?
Can you explain any transaction to an auditor?
Category 2: Categorization
Are expense categories consistent month-to-month?
Is “Ask My Accountant” / Uncategorized empty?
Do similar expenses go to the same account?
Category 3: Timeliness
Is bank reconciliation current (within 30 days)?
Are AR/AP aging reports accurate?
Is undeposited funds cleared regularly?
Category 4: Compliance
Do all 1099 vendors have W-9 on file?
Is sales tax filed and current?
Are owner draws properly classified?
Category 5: Controls
Does someone besides you review transactions?
Are there approval thresholds for large purchases?
Is access to financial systems limited appropriately?
Scoring: – 12-15 YES: Good foundation – ready for optimization – 8-11 YES: Gaps exist – prioritize the NO items – 0-7 YES: Significant risk – consider professional assessment
Key Takeaways
- Balanced is necessary but not sufficient – It’s the floor, not the ceiling
- Traditional policies fail because they’re unenforceable – Human memory isn’t a control
- The cost of messy books compounds – Small gaps become expensive problems
- The fix is executable policies – Rules that run, not documents that sit
Your Next Step
Complete the Warning Signs Checklist above. For each NO answer: 1. Document the current state 2. Define what “good” looks like 3. Create a simple process to close the gap
Want an expert assessment? Apply for a complimentary Tax Ready Assessment – we’ll review your QuickBooks file and provide specific findings.