The 10 Minute Bank Reconciliation

I am re-posting this blog from a few years back.  Many business owners, bookkeepers and accountants struggle with performing bank reconciliations and resolving variances.  And yes, there are times when I can do a bank reconciliation in 10 minutes, even for clients with hundreds of transactions per month.

Over the years, I have developed a number of techniques to help me quickly identify bank reconciliation errors and potential causes. But before I get to the “how” of performing bank reconciliations, what are they and why should you do them?

The purpose of a bank reconciliation is to allow you to determine the accuracy of cash balances on a specific period-end date (usually monthly) as recorded in your general ledger.  You should always perform your bank reconciliation as of the last day of the accounting period, not mid-month, because that’s not the date that you are closing the accounting period.  So, get the bank to give you statements with a month-end cut off.  The bank statement tells you which transactions have cleared the bank, regardless of whether such transactions are known to you.  Your books have the complete record of all of your known transactions, but items can appear on your bank statement that you don’t know about.  These are, generally:  NSF checks, interest earned, bank fees, other automatic debits, and deposit errors.  Likewise, items that you know about may not be known to the bank, such as outstanding checks and deposits in transit.  So, the bank reconciliation ties together these two separate sets of records, with your own books trumping everything, because that’s what will be reflected in the general ledger.

Bank reconciliations before the existence of accounting software were often performed in a “4 column” format, with the following column headings:  Beginning Balance, Deposits, Checks, Ending Balance.  This format allowed the accountant or bookkeeper to quickly identify reconciliation issues because each column would then be totaled to agree to the bank’s totals.  This would mean that you could tell if your error was in the checks or in the deposits section of your bank reconciliation.  With accounting software, even though the process is the same, your ability to identify errors is reduced.  A lot of software packages will try to give you hints, but sometimes the hints add to the confusion.  In addition, with accounting software, you can fail to mark items that have cleared and still appear to have correctly performed a bank reconciliation.  This occurs when you or your CPA make journal entries to correct errors, but the journal entries and the errors themselves never get marked as cleared.  I have seen bank reconciliations with un-cleared transactions going back 5 years!  Obviously, this cannot be even factually true, and it means that whoever is performing the bank reconciliations does not understand their function very well.

Aside from ensuring the accuracy of your general ledger cash balances, timely and accurate bank reconciliations are one of the most important elements of your internal control system.  Stale items or unusual outstanding items at period end can indicate financial fraud.  Cash accounts are involved in 93% of all frauds, which is why auditors are trained to search for and identify unusual transactions when reviewing bank reconciliations.  Management review of bank reconciliations is a critical function, but often managers don’t actually know what to look for.  If this describes you, contact your CPA and ask them to show you how to perform this kind of review and what to document, and I’ll offer a few tips below.

Now, back to the 10 minutes I have allotted for the bank reconciliation:  open up your reconciliation tab in your accounting software and enter the period end date and the bank statement balance where indicated.  Make sure that you have the software set up NOT to show transactions for periods after this date.  Mark all of the transactions as cleared.  Now, working backwards, take your bank statement and identify the last check which cleared, and breaks in the check sequences and unmark those checks which haven’t cleared.  Then, enter any automatic debits that you haven’t yet recorded in your books, but which are shown on your bank statement.  Check the last deposit in your books to see if it has cleared the bank.  If not, unmark deposits that have not cleared.  Enter your interest earned and any bank charges shown on the bank statement.  Not in balance yet?  Scan the bank statement for any surprises, such as NSF checks and deposit errors.  Most of the time, the bank reconciliation has now been balanced and is ready to be printed (yes, always print or pdf it because certain software may not allow you to do this later, and your CPA wants it and so does the IRS if you are ever audited).

If you are still out of balance at this point, it is now time to check each item from the books to the bank, one by one.  Again, I usually start backwards because it is generally the month-end transactions that are the culprit.  Remember that your books trump all, so you use your book transactions as your source and compare that to what has cleared the bank, not vice versa.

Once in balance, the bank reconciliation is now ready for management review.  The business owner or manager should confirm that only current transactions are listed in the outstanding checks.  Checks older than 6 months are considered stale.  Usually, these are errors or duplicates that have not been corrected, but if not, Oregon businesses are required to turn over any unclaimed payments to the State Department of Lands.  If you see any unusual outstanding checks, or any “corrections” entered immediately after month end, this could indicate fraud.  Likewise, outstanding deposits or transfers among accounts that are from a prior period or are immediately reversed after month end could also indicate fraud. Scan through all the transactions listed and make sure that the totals appear reasonable in comparison to your typical monthly volume and dollar amounts of transactions, and that check sequences make sense.  Scan check payees to make sure you recognize the vendors.  Review the payroll entries and trace them back to the payroll reports provided by your service bureau.  And, even though most bank reconciliations are performed by the same person who recorded the transactions (your bookkeeper), make sure that this person IS NOT a check signer.

The internal control function of the bank reconciliation is where you should spend your time.  The routine part involving doing the reconciliation itself should not be a hassle, and if it is – get in touch with your accountant for their advice on how to make the process more efficient.

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How to Communicate (and Commune) with your CPA

When I started my accounting career back in the mid 1980’s, written business communications were a formal affair, conducted via correspondence carefully tapped out on an IBM Selectric by a highly competent office manager with lightning speed dexterity.  The missive (or missile, in some cases) followed a strict three paragraph format:  introduction, body, and conclusion.  Attachments were provided to elucidate whatever was discussed in paragraph 2, and the composition adhered rigidly to formal requirements (thank you, high school English teacher).

Informal communications which required a back and forth discussion and exploration of ideas were handled in face to face meetings, or over the telephone.  Voice mail did not exist. So, upon arriving at work, a stack of messages would be waiting upon one’s desk, haphazardly arranged on a spiky metal implement which could double as a weapon if needed.  Such messages were the original of a triplicate carbon form, with copies dutifully archived in the client’s file as well as the firm’s master file.

Back then, sometimes the volume of telephone communications from clients could be overwhelming especially during tax season, but we CPAs didn’t have to deal with junk calls or other unwanted communications from unknown individuals.  We relied on our highly competent admin staff to field every communication, and filter out all but that which mattered.

Since then, many extraordinary changes have taken place.

First and foremost:  the volume and detail of information needed to prepare a client’s tax returns increased significantly, more than can be described in this post.  Compliance requirements such as 1099 and 1098,and K-1 reporting and matching upped the number of documents needed to proceed with tax preparation, but represent just a small fraction of the increased complexity of tax law in the U.S. from the 1980’s to the present.

Amidst all of these tax law changes, the internet emerged in the 1990’s, with its related instant communications via email. In 2007, Apple introduced the first iPhone, although BlackBerry (“CrackBerry”) had dominated the smartphone market prior to this.  With the immediacy offered by these new forms of communication, the quality and reliability of such communications seemed to deteriorate proportionally with the increase in technological advances.  The temptation to send out a communique (or a series of communiques) with little detail, and in a reactive mode is, I think, too great even for the most contemplative of souls.

As it turns out, there’s a reason for this.  Humans convey information most effectively in face to face encounters.  That’s how our ancient brains are wired.  Researchers have determined that emails convey only 7% of the information that would otherwise be conveyed in a face to face meeting.  And, voice communications convey about 45%.  Why?  Human brains are programmed to do very complex stuff.  Facial cues, body language, and vocal intonations all contribute to the layers of complexity and meaning in any face to face communication.  Voice communication via telephone has the benefit of conveying the information supplied by vocal intonations.  Who doesn’t want to receive a telephone call from their doctor, as opposed to an email response?  There is a lot of information about trust and caring that can only come through with voice or face to face communications.

And that’s another interesting aspect of communications.  Humans need to determine whether or not they can trust the person they are communicating with.  Face to face communications provide all the cues one can ask for – although many people are still manipulated in face to face encounters by bad actors.

The trust factor that is normally evaluated in face to face communications is apparently replaced (according to research) by the quickness of response in email or text communications – obviously a very unreliable criteria in evaluating trustworthiness.  Having more emails than can be responded to in 24 hours is the new normal for professionals.

What to do?  If you only need to forward documents or send otherwise “inert” information – forward an email.  But, if you really want to explore ideas and share information about changes in your financial situation, pick up the phone and give us a call.  We would like to talk with you.

Retroactive 2017 Tax Law Changes

While I’ve had many a melt-down over the years regarding federal tax legislation enacted late in the tax year, or even a few days after the tax year has ended, never before has there been a retroactive change to prior year tax law enacted after tax filing season has actually begun..

These are the tax breaks that officially expired on 12/31/16, also known as “extenders” because they are typically re-upped each year by Congress.  Why weren’t they included in the “tax reform” package that was hastily enacted in late December of 2017?  Well, because they are tax expenditures, and therefore cost money – billions of dollars in fact.  That would have blown Congress’ contrived $1.5 trillion net expenditure limit, so they couldn’t be added to that legislation.  Solution?  Just add them later to a budget deal, raise the debt ceiling, and away you go.  After all, the true cost of the extenders is hidden in plain sight behind their sunset dates.  By making them “temporary”, these extenders cost far more than what is included in the federal budget, by some accounts, approaching $100 billion.

Meanwhile, IRS must now revise dozens of tax forms and schedules, including the 1040 itself in the middle of the 2018 filing season.  In response to this unheard of development, IRS issued what is probably the shortest press release in history – a 3 sentence “statement” promising to assess the significant changes to the tax law “as quickly as possible”.

The newly enacted budget deal includes money for lots of stuff (how about a parade?) but doesn’t provide funding for IRS to address not only the “tax reform” package passed in late 2017, but the newly revived extenders as well.  The IRS has estimated that it will need $397 million to upgrade systems and hire new staff for the expanded workload.  However, they were only given $90 million to do so.  In my profession, it may seem odd to have compassion for IRS and its workers, but this year I do, more than ever.

Taxpayers who have already filed their 2017 tax return, but could benefit from an extender that was retroactively re-enacted, will need to amend their tax return to claim any benefits.  Sadly, the cost of doing so may outweigh the tax savings.  This fact pattern affects mostly lower income filers who tend to file early in the season.  Score another goal for income inequality that is baked right in to the cake.

Oregon’s Measure 97: A Lazy Cheap Shot, Vote No

Oregon’s proposed Measure 97, which will appear on the November ballot, is now being hotly debated, with proponents and opponents gearing up to outspend each other and do a little economic stimulus for the advertising and lobbyist industries.

The measure provides for an unprecedented 2.5% gross receipts tax on certain C corporations with sales in Oregon above $25 million. The proposed law exempts S corporations, LLCs, and “Benefit” Corporations from its provisions. It is projected to raise a whopping $3 billion per year from its tiny tax base. It is not a true VAT tax, so its effects will be multiplied across various levels of the supply chain as it forges its regressive path down to consumers. And, thanks to our world of corporate monopolies who influence pricing, some affected companies, such as our very own Powell’s, will not be able to raise prices to help absorb the tax hit, and so instead will be faced with cost cutting decisions such as employee layoffs. Other businesses that operate at a loss, or with thin margins would still have to come up with a way to pay the tax.

The measure is being sold as a way to “save the children” – an appeal so dishonest and crass as to be sickening. It is, in fact, a PERS bailout plain and simple. And it is a regressive tax, sloppily drafted with gaping loopholes, relying on a narrow tax base. In short, it is just about the worst piece of tax policy I think I have seen in a while (not including the Pdx Arts Tax).

So, let’s break it down:

Tax Reform – It’s tempting to get excited about a tax that falls on “the man” rather than on ourselves. Isn’t it only right that big corporations pay their fair share? For tax policy scholars, fairness has a specific meaning: progressivity. A tax can only be fair if it is progressive. Hence, most tax policy reformers rule out consumption taxes as falling too heavily on the poor, who need to spend most if not all of their income just to survive. Consumption taxes miss the mark in terms of fairness, and are to be avoided if fairness is your actual goal. Here we have a hidden consumption tax masquerading as a gross receipts tax. ALL of the economists who studied the proposal have concluded that the tax is regressive. The impact could be especially bad in the health care industry, where medical providers will be forced to pass on the rising costs to those least able to afford the increase. For these reasons, you can conclude that this tax is grossly unfair to the working poor in Oregon. And, as any good tax policy scholar knows, a well drafted tax policy is one which relies on a broad tax base. So, the measure fails miserably as tax reform. That’s because it was drafted by political activists who developed the measure by hiring consultants to conduct focus groups, to see what would “sell” in Oregon. It is our legislature that should undertake meaningful tax reform, not marketing experts. We recently had significant corporate tax reform back in 2010 with the passage of Measure 67. Now, all corporations must a least pay a minimum tax that ranges from $150 for small C corporations to $100,000 for businesses grossing $100 million or more. Our current minimum tax exempts S corporations and LLC’s from these provisions, which provides a loophole that could be closed should the legislature deem this as a legitimate way to raise additional funds. But, that’s just one idea among many that could have been considered by the legislature.

Loopholes Galore – The gaping loopholes in Measure 97 provide for a number of simple solutions that corporations can employ to escape the gross receipts tax: elect S status, reorganize as a partnership or LLC, choose to be a “benefit” corporation (which involves a meaningless set of steps that will keep law firm paralegals busy for a little while), relocate out of state, and best of all: constitutional challenges to the law. Larry Brant of Garvey Schubert Barer, among other legal experts, have already outlined a laundry list of possible constitutional challenges, which you can read about here.

School Funding – There’s no doubt that our public schools need more money to adequately prepare our children for adulthood. The reason that they need more money is that the unfunded $21 billion PERS liability is looming, and each year schools are assessed their contribution requirement, which now takes up a larger and larger portion of each school’s budget, leaving not enough left for teachers and curriculum. While various PERS reforms have been attempted, as it turns out, it’s illegal to break a contract with your employees. And, I for one do not begrudge a single teacher or other public servant their pension benefits – they were earned fair and square.

Let’s get some perspective, though, on the enormous burden the PERS board has laid before us, which was decades in the making:

2015 Annual Oregon budget: $33.4 billion
2015 Portion of budget spent on education: 19%
2015 Portion of budget spent on Medicaid: 21%
(source – BallotPedia)

As you can see from the above numbers, the unfunded PERS liability dwarfs the ENTIRE education budget by a factor of 3. How on earth will Oregon ever have enough money to fund this debt that we owe to our public servants? Add to that the ever increasing costs of Medicaid, transportation, and other programs, and one can see the temptation to try to find someone else to pay the bill. The legislature must work very hard to come up with viable solutions, and those solutions must include a combination of tax increases and tax savings. Closing loopholes, enacting viable PERS reforms, eliminating wasteful spending, and rooting out fraud need to be at the top of our priority list. Tax reform must be based on sound policy that involves both fairness and simplicity, and that relies on a broad tax base.  That is how we will “save the children.” We won’t save them by passing a feel good tax that purports to tap evil corporations, and instead hurts the very children we need to help.

Is Social Enterprise a Con?

That’s the argument is made by David Groshoff, a Harvard educated law professor and business executive. In his treatise “Contrepeneurship? Examining social enterprise legislation’s feel-good governance giveaways” Groshoff asserts that, based on his academic research, Social Enterprise is a “con” led by promoters, dubbed “contrepeneurs”. These players navigate the murky, greenwashed world which resides at the nexus of private equity, legislatures, academia, and guilt-ridden wealthy investors.

He maintains that these con artists possess and advance interests which are opposed to those of actual equity holders, and that they have nothing but disdain for longstanding business governance practices. They use a deceptive maze of ethically questionable marketing tactics to promote their fake objectives. And, they have created a self-serving and self-reinforcing cottage industry whose aims run counter to that of the very communities they claim to benefit.

Harsh words? We’ll see.

In my own CPA practice I can attest to the hypocrisy of Social Enterprise proponents’ claims of “triple bottom line” and community and environmental benefits. I have observed the opposite: private equity which uses B Lab certification to promote its portfolio of business acquisitions to the conscientious wealthy investor class, all the while destroying those very businesses with ill-conceived scaling,  greenwashing, and the burden of massive and hidden management fees which characterize the world of private equity. This process can lead to the destruction of the business investee, which was once a healthy enterprise. That is not “beneficial” to anyone but the promoters who get their fees no matter how their portfolio of acquisitions actually performs. Without transparency, wealthy investors rely on their personal relationships with these promoters and on Social Enterprise’ claims of ethereal benefits to the world at large. Their guilt is assuaged.  Meanwhile, businesses, jobs, and communities are harmed.

While my experience is only anecdotal, Groshoff has done the research to support his claims. He has found that, despite the marketing and brand managing of Social Enterprise to investors and legislators, these new enterprises have costs which substantially outweigh any benefits.

First of all, what the heck is Social Enterprise? Unfortunately there exists no basic definition. “An organization which advances a social mission through entrepreneurial, earned income strategies” is one definition, among many. But, the lack of clarity in defining what it actually is only serves to benefit its promoters. It’s hard to be held accountable to goals when those goals are not clearly defined. And, while Social Enterprise may possess legitimate, if ill-defined goals, related legislative efforts are a result of vigorous brand management and marketing that appeals to “unsophisticated equity investors” – Groshoff’s unflattering term for what I call the conscientious wealthy investor class.

Leaving the definition issue aside, Groshoff reviews the legislative history of the lobbying efforts led by Social Enterprise Legislation (“SEL”) promoters. In various states, one can find Benefit Corporations, L3C’s (low-profit LLCs), and FPCs (Flexible Purpose Corporations).

Using California as an example, Groshoff discusses how these entities were created under new state legislation, much to the chagrin of the California State Bar, which was genuinely concerned that such legislation would marginalize shareholders and rely on an un-vetted 3rd party standard setter (B Lab), an entity who derives benefit from doing so in a circular self-serving industry of its own creation and of which it is the only player. Further, the California Bar expressed dismay that legislation was being considered which was directly harmful to shareholders by removing the fiduciary duty of a business’ directors and thus allowing them to act in a morally hazardous manner that would otherwise lead to liability claims under traditional corporate law. But, the legislation passed anyway, and the B Corporation bandwagon was underway. All aboard!

The resulting rush of legislative activities across the U.S., and indeed throughout the world, has been fueled by B Lab and its many minions. Though B Lab currently enjoys tax exempt status, and so is conducting its lobbying efforts at taxpayers’ (our) expense, those days may be numbered. Groshoff asserts that B Lab is not deserving of its tax exempt status for a variety of reasons, one of which is that its extensive lobbying activities were not properly disclosed, and if they were disclosed would reveal that much of B Lab’s resources are spent on lobbying.

But, is Social Enterprise a con?  I think it is more of an agenda whose aims are not fully known or understood.  One of those aims may be the elimination of government as a regulator, replaced by “benevolent” private interests.  And, Social Enterprise is certainly a magnet for con artists of all types, as the legislative parameters governing them have no regulatory teeth.

Meanwhile, I have seen a kind of grassroots form of social enterprise emerging among the businesses and non-profit organizations that I work with. These new entities are often democratically governed, and some are organized as multi stakeholder cooperatives. They don’t need or want private equity, and they scale up as resources and market forces allow. Funding comes from small, local investors, bank lending, and from the ability to reach global markets via technology. These enterprises are closer to “true capitalism” than the corporate capitalism we see in today’s economy. They work to treat one another, their vendors, their community, and their environment with respect. Existing corporate law allows them to consider the interests of those other than investor/owners, and, they don’t need anyone to “certify” that they are doing well by doing good.

MLPs in UMAs: Dumb and Dumber

First to the acronyms:

MLP stands for Publicly Traded Master Limited Partnerships. These are a kind of tax and legal hybrid, producing an offspring that appears plump and robust, but whose internal workings bear no resemblance to its counterparts in the investment world.

UMA stands for Unified Management Account – an automated conglomeration of multiple individual investor accounts, controlled by a single robot known as a computer program, which automates cash flow, rebalancing, and other investor “services”. Humans not required.

Investors do work with humans, however, who they affectionately refer to as their “investment advisors”. Unfortunately, many investors do not realize that some of these humans have nothing at all to do with managing their portfolios. If you don’t know whether you have a UMA account, ask your advisor. One telltale sign will be pages (sometimes reams) of trades each year across all of your accounts, for no apparent reason, and with no thought whatsoever to tax efficiency or the burden of tax compliance.

MLPs became trendy when energy pipeline businesses decided to reorganize as limited partnerships in an effort to avoid corporate income taxes. They are characterized by their alluring quarterly distributions, which are governed by the partnership agreement. Pipeline businesses have enjoyed historically stable cash flows, so distributions are typically based on some measure of cash flow, and do not represent your share of net income, but are usually quite a bit in excess of it. So, when you receive distributions, the IRS lets you treat this as “return of capital” under the partnership rules, and not as taxable income. Return of capital reduces your tax basis. More on that later.

Everyone thought that MLPs were somewhat immune to energy commodities price risk, but that has not been borne out by the test of time. Now that oil prices have plummeted, so have MLP valuations tanked. It is really dumb to expose your portfolio to unplanned and unknown risks, but most investors with UMA accounts have no idea what the investment manager robot is up to. Dumb, dumb, dumb, dumb…

What’s more, the complex layers of tax compliance which drag down your real rate of return go unmeasured, unacknowledged, and viciously disputed by those trying to sell you these MLPs. And, multiple buys and sells across the range of MLPs you may hold create taxable events that not only subject your portfolio to unnecessary taxation, the amount of taxes due is tricky to unravel given that MLPs unit holders must recapture depreciation under Code Section 751 when a sale takes place.

When you buy a unit, you become a “partner” and that means that various items of income and deductions retain their character and “flow down” to you. That’s not really so bad. The problem is that in order for the MLPs to be Publicly Traded, they are given adverse treatment compared to other passive investments, under IRC Code Section 469(k) (stay with me), which means in plain English that your passive income from one MLP cannot be used to offset your passive loss from another MLP.

But that’s just the beginning of the journey. Each year, an investor will receive a K-1 Form from the MLP showing the various items of income and deductions which must be reported on various forms and schedules in an investor’s tax returns. Often, for MLPs held in UMAs these K-1s will reflect tiny amounts which must still be dutifully recorded, regardless of how time consuming. If the UMA robot has decided to buy and sell tiny tax lots of the MLPs throughout the year, the task of interpreting the K-1 form becomes even more difficult, as it is necessary to reclassify capital gains to ordinary income due to depreciation recapture. Sometimes, this adjustment will create a capital loss and at the same time create ordinary income. Now, that’s really dumb, because capital losses in excess of $3,000 have to be carried forward, whereas ordinary income must be recognized immediately.

Investors were lured into the MLP investment world by the precipitous drop in interest rates after the crash of 2008, being promised high “returns” which often turned out to be just the investor’s own money coming back to them. Retired individuals seeking a safe, low risk cash flow such as was once available from Municipal Bonds and U.S. Treasuries were targeted by promoters.  Now, many such investors are finally waking up to what has happened, but unfortunately, they are no richer for the experience.

 

 

The B (S?) Corporation

Now that so-called “B Corporations” are popping up around the country, it’s a good time to review what they are, how (and if) they differ from “regular” corporations, and whether they have lived up to their mission, which is to benefit not only shareholders, but the entire community.

The B in the name stands for “benefit”, with the idea that these types of entities are better than non-B corporations because they are structurally required to consider what is best not only for their shareholders, but for others involved with the business, such as employees, vendors, the community, and the environment. Currently, 28 states  have laws on the books which permit the formation of a B Corporation, requiring that their organizational documents comply with governance principles that are, in theory, designed to benefit other stakeholders, in addition to the corporation’s shareholders.

The B Corporation designation is not a tax concept, and is ignored for all taxation purposes.  However, a few states have seen fit to offer tax credits and other incentives to B Corporations.

B corporations formed under state law can also seek certification from the one and only self-appointed body – B Lab – a non-profit organization formed exclusively for this purpose.  How does it work?  Well, B Lab does not permit their standard-setting process to be transparent.  In order to get certification, the B Corporation not only has to pay an annual sliding scale fee, but then has to submit to the process of trying to prove that the corporation meets B Lab’s objectives.  Without competition, or community input, it is unknown whether the B Lab certification means much, except as a marketing tool.

For anyone who is curious about B Lab, they would be well advised to by-pass its annoying website, and go straight to a review of B Lab’s 990 Forms.  There, you will find a some interesting information, including the relationships that B Lab has with other entities, such as a controlling (67%) ownership in a for profit entity called B Lab IP LLC, which produced $2.5 million in net income for B Lab in 2013, bringing B Lab’s total revenues to over $7 million.

B Lab’s board and the Advisory Council appear to be dominated by wealthy individuals, and/or those involved in managing venture capital funds, private equity funds, and private foundations.  These are the same funds that package B corporations into their portfolios to help them raise investment funds from the conscientious wealthy investor class.  It is very troublesome to me that the overseers of B Lab benefit financially (albeit indirectly) from B Lab’s primacy.   The lack of truly independent governance and any standards transparency renders B Lab illegitimate as a 3rd party regulator, in my opinion.

B Lab’s website touts the primary benefits of obtaining certification as brand differentiation, generating press, saving money, and being able to attract investors. Also included in this laundry list are tag lines like “protect your mission”  and “lead a movement”.  Why would a 3rd party regulator offer financial incentives to the very companies it is regulating?  It seems unethical.

Apparently, I’m not the only one who thinks so.  Professor Rae Andre’ of the Northeastern University College of Business,  in her research paper entitled Assessing the Accountability of the Benefit Corporation:  Will This New Gray Sector Organization Enhance Corporate Social Responsibility?, concludes “…the emergence of the benefit corporation demonstrates how some companies are determined to control the process by which businesses are held accountable, making them accountable to each other rather than to society.”  She goes on to state: “The research suggests that benefit corporations follow accountability practices that serve particular private interests, and because of this, the probability that they will be responsive to the citizenry as a whole, to society, is low.”

Of the over 1,000 B certified companies listed on B Lab’s website, I easily spotted quite a few that are controlled by private equity and venture capital firms.  Once the exit strategy for the investment has been triggered, many of these companies will be sold to large publicly traded corporations where they will be taken apart and absorbed, or simply shut down.  Employees will lose their jobs, and once vibrant workplaces will go dark.  Companies that cannot be sold because they are unprofitable are sometimes pawned off on inexperienced employees, or simply quietly liquidated.  I wouldn’t call that “beneficial.”

Some legal scholars have begun to weigh in on the troubling legal aspects of B Corporations.  One of these is the myth that under traditional corporate governance laws, corporate managers are not permitted to act in the best interests of the community at large or other stakeholders, and can in fact serve only one god:  the shareholders.  According to the legal experts, this is simply not true.  In fact, many states have adopted “constituency statutes” that expressly permit managers of plain old corporations to consider the interests of other stakeholders.  Apparently, there has never been a single court case in which business directors were held liable for considering non-shareholder interests nor any case that imposed a general duty to maximize profits and short-term shareholder value.  Professor Lynn Stout of Cornell Law School has debunked this myth in her book, The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations, and the Public.

While there are probably many B Certified Corporations that are well-run, are privately or employee-owned, and walk their talk, there is no reason, other than brazen “profit motive” to become B Certified by B Lab.  And that, as Professor André points out, is the height of hypocrisy.  It is also a waste of time, effort, and money that could instead be spent on actually benefiting a company’s stakeholders.

If you are inclined to consider alternative business structures, you could take a look at the Multi-Stakeholder Cooperative business model.  This structure is a modification of the old cooperative model, whose humble origins stem from small farmers banding together to market and distribute their products.  In fact, the landmark Tax Court case which established many of the income tax principles related to cooperatives hails from right here in the Pacific Northwest – Linnton Plywood v. United States.

If you really want to operate your business ethically and mindfully, and to consider the interests of all stakeholders, there is nothing to stop you.  And, no certification is required.