“Accountings” are everywhere. Really, they are everywhere. But what an accounting is, and what it does or does not tell you depends on the facts of the situation. For example, for investors and potential investors a public company must submit financial statements that are prepared pursuant to GAAP (generally accepted accounting principles) and that are audited pursuant to GAAS (generally accepted auditing standards). But those statements, or that reporting, includes or should include notes to the financial statements, there might be MD&A (management discussion and analysis) depending on the circumstances, the auditor is required to discuss certain matters with management, and the audit committee or the board, the reporting might include non-GAAP financial measures, and now we have CAMs (critical audit matters), to name a few of the additional areas or topics of information that are or that might be provided. And still there is ongoing angst that these financial statements, or accountings, fail to provide investors with some of the important information that they need or that would be or might be helpful for purposes of evaluating the organization, such as, for example, possibly a discussion about or an evaluation of the organization’s ESG (environmental, social and governance).
Now . . . I am going to make my CPA friends cringe, and yes, as I also practiced as a CPA, I am also aware that what I am going to say next is not technically correct in the strict sense, but as an accountant or auditor might be engaged to perform an audit of financial statements that are prepared pursuant to GAAP and that are audited pursuant to GAAS, or some other engagement such as a review, or a compilation, or something less than those, or some other measure or procedure, some people might consider each of those to also be an “accounting” in the context of their situation.
As another example, almost each of my trust, estate, and conservatorship cases also involves an accounting. In the context of a trust or an estate or a conservatorship, in California an “accounting” has a legal definition as defined pursuant to the various pertinent Probate Code sections and local rules of court; however, beneficiaries, for example, also sometimes are willing to accept a summary accounting or account that contains less than full information, or in part different information, or that is in a different format because it suits their purposes.
And then, every business and organization undoubtedly will have various “accountings” that are prepared for internal and management purposes.
Thus, an “accounting” that has strict requirements might be required. Or an “accounting” might contain some other information or be in some other format.
Obviously, the above discussion is intended to be only for introductory purposes and it only touches the surface. I last updated my detailed discussions about these topics in 2017 in Tate’s Excellent Audit Committee Guide. Any discussion about what an audit, review, compilation, or some other measure or procedure is or involves and the information that it provides or doesn’t provide would be a detailed discussion.
The following are a few discussions from court cases that have viewed what an accounting is and accounting duties in the broad sense, i.e., where there isn’t necessarily a document or an agreement (such in a LLC operating agreement, or a partnership agreement) that more specifically describes or mandates the preparation, contents and processes of the accounting. Thus, first evaluate whether what the accounting is, what it includes, and how it is prepared are described or mandated. And if the described or specified mandated requirements are not sufficient, consider the definition of an accounting in the more broad sense.
“Accounting” usually means the striking of a balance between debits and credits, showing a balance due, if any. Peoples Finance & Thrift Co. of Visalia v. Bowman (1943) 58 Cal. App. 2d 729, 734. An action for an accounting, which usually invokes the equity powers of the court, is a proceeding for obtaining a judicial settlement of the accounts of the parties (Verdier v. Superior Court in and for City and County of San Francisco, (1948) 88 Cal. App. 2d 527, 530), and is an action where a party seeks an amount that cannot be determined or fixed without an accounting. The books of the partnership should properly be considered in ascertaining the state of the account. Freeman v. Donohoe (1923) 65 Cal. App. 65, 87. An accounting action “is a proceeding in equity for the purpose of obtaining a judicial settlement of the accounts of the parties in which proceeding the court will adjudicate the amount due, administer full relief and render complete justice.” Flores v. EMC Mortg. Co. (E.D. Cal. 2014) 997 F. Supp. 2d 1088, 1119–20.
And although the following are a few discussions from a couple of partnership accounting cases, remember that in the context of a LLC for example, some of the legal duties between the members or between the manager and the members have been defined by courts as being the same or similar to some of those same duties between partners in a partnership.
In the context of a partnership dissolution, an accounting is an action to determine the rights and liabilities of partners and the one great occasion for comprehensive and effective settlement of all partnership affairs. All claims and demands arising between partners should be settled upon such accounting. Thus, when an accounting is ordered, it should include a complete adjustment of all partnership accounts and partnership affairs as between the partners even though this involves items accruing after the commencement of the suit or before the execution of the written partnership agreement. Alechoff v. Edwards (1921) 55 Cal. App. 277, 279. In a partnership accounting, “it would be inequitable in a partnership accounting case, to require that some partners pay the claims of other partners before their own offsetting claims are adjudicated. The proper procedure is to resolve all of the competing claims, and then render a net judgment, after offsets, in favor of the partners with the greater claims.” Rosenfeld, Meyer & Susman v. Cohen (1987) 191 Cal. App. 3d 1035, 1049.
Best to you. David Tate, Esq.
Remember, every case and situation is different. It is important to obtain and evaluate all of the evidence that is available, and to apply that evidence to the applicable standards and laws. You do need to consult with an attorney and other professionals about your particular situation. This post is not a solicitation for legal or other services inside of or outside of California, and, of course, this post only is a summary of information that changes from time to time, and does not apply to any particular situation or to your specific situation. So . . . you cannot rely on this post for your situation or as legal or other professional advice or representation.
Thank you for reading this post. I ask that you also pass it along to other people who would be interested as it is through collaboration that great things and success occur more quickly. And please also subscribe to this blog and my other blog (see below), and connect with me on LinkedIn and Twitter.
Best to you, David Tate, Esq. (and inactive California CPA) – practicing in California only
Litigation, Disputes, Mediator & Governance: Business, Trust/Probate, Real Property, Governance, Elder Abuse, Investigations, Other Areas
Blogs: Trust, estate/probate, power of attorney, conservatorship, elder and dependent adult abuse, nursing home and care, disability, discrimination, personal injury, responsibilities and rights, and other related litigation, and contentious administrations http://californiaestatetrust.com
Business, D&O, board, director, audit committee, shareholder, founder, owner, and investor litigation, governance and governance committee, responsibilities and rights, compliance, investigations, and risk management http://auditcommitteeupdate.com
My law practice primarily involves the following areas and issues:
Trust, Estate, Probate Court, Elder and Dependent Adult, and Disability Disputes and Litigation
- Trust and estate disputes and litigation, and contentious administrations representing fiduciaries, beneficiaries and families; elder abuse; power of attorney disputes; elder care and nursing home abuse; conservatorships; claims to real and personal property; and other related disputes and litigation.
Business, Business-Related, and Workplace Disputes and Litigation: Private, Closely Held, and Family Businesses; Public Companies; Nonprofit Entities; and Governmental Entities
- Business v. business disputes including breach of contract; unlawful, unfair and fraudulent business practices; fraud, deceit and misrepresentation; unfair competition; licensing agreements, breach of the covenant of good faith and fair dealing; etc.
- Misappropriation of trade secrets.
- M&A disputes.
- Founder, officer, director and board, investor, shareholder, creditor, VC, control, governance, decision making, fiduciary duty, conflict of interest, independence, voting, etc., disputes.
- Buy-sell disputes.
- Funding and share dilution disputes.
- Accounting, lost profits, and royalty disputes and damages.
- Insurance coverage and bad faith.
- Access to corporate and business records disputes.
- Employee, employer and workplace disputes and processes, discrimination, whistleblower and retaliation, harassment, defamation, etc.
Investigations, Governance, and Responsibilities and Rights
- Corporate, business, nonprofit and governmental internal investigations.
- Board, audit committee, governance committee, and special committee governance and processes, disputes, conflicts of interest, independence, culture, ethics, etc.; and advising audit committees, governance committees, officers, directors, and boards.
Mediator Services and Conflict Resolution
* * * * *