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Four ways out of a partnership and the hot assets waiting in each one

Earmark Team · August 27, 2026 ·

Jessica wants out of Lighthouse LLC. After several years of losses, her partner Seth remains committed, but she is done. If Seth pays her $10,000 for her interest, the transaction may look small, but it isn’t.

The transaction also relieves Jessica of her $40,000 share of partnership liabilities. For tax purposes, that debt relief helps produce a $50,000 amount realized. The check alone doesn’t tell the whole story.

In a recent episode of Tax in Action, Jeremy Wells, EA, CPA, closes his four-part partnership series by connecting outside basis, distributions, and dispositions. These topics belong together because outside basis helps determine whether distributions are taxable and how much gain or loss a partner recognizes when leaving.

Outside basis belongs to the partner

Outside basis is a partner’s adjusted tax basis in the partnership interest. It is not the partnership’s basis in its assets, and it is not the partner’s capital account.

A capital account is a separate partnership-level measure of a partner’s equity. It may be negative and generally does not include the partner’s share of liabilities or partner-level basis adjustments.

Jeremy emphasizes individual partners must maintain the record. “Individual partners, not partnerships, are responsible for tracking the partner’s basis in their partnership interest.”

Initial outside basis may come from:

The adjusted basis of property contributed under Section 722
The cost of a purchased partnership interest
Section 1014 basis for an inherited interest
Section 1015 basis for an interest received by gift

Basis then increases for income, gains, additional contributions, and increases in the partner’s share of liabilities. It decreases for distributions, losses, deductions, and reductions in the partner’s liability share.

The order matters, too. Positive adjustments come first, followed by nonliquidating distributions and then losses and deductions. This ordering generally preserves tax-free distribution treatment when possible. You normally calculate basis at year-end, but if the partner disposes of their interest during the year, you calculate it on the disposition date.

That leads to a practical warning. Tax software may produce a basis worksheet, but the worksheet might not appear if you didn’t enter an original basis. If the records are missing, practitioners may need to reconstruct basis using prior K-1s, capital account information, contributions, distributions, and annual liability changes. The partner carries the burden of proving enough basis to deduct losses.

Section 704(d) suspends losses above basis. They can become deductible if income or a contribution later restores basis. For an individual, outside basis is only the first limitation. Sections 465, 469, and 461(l) may also restrict losses. Suspended Section 704(d) losses generally don’t transfer to another taxpayer, so an exit can leave them unused permanently.

Debt relief counts even when no cash changes hands

Partnership liabilities make outside basis especially important. Section 752 treats an increase in a partner’s share of partnership debt like a cash contribution. It treats a decrease like a cash distribution.

The rule reflects the economics. When a transaction relieves a departing partner of debt exposure, that partner receives a financial benefit even if no money changes hands.

Liability allocations don’t automatically follow ownership percentages. You generally allocate recourse debt to the partner or related person who bears the economic risk of loss, such as through a qualifying guarantee or pledged collateral. Nonrecourse debt follows a different, more complex allocation process.

For Jessica, $0 of tax-basis capital plus a $40,000 liability share (assuming no other partner-level basis adjustments) gives her an assumed $40,000 outside basis. You treat her as receiving $40,000 when that liability share falls to zero.

Hot assets can convert capital gain into ordinary income

A sale or exchange of a partnership interest generally produces capital gain or loss under Section 741. Section 751(a) creates an important exception for “hot assets,” including unrealized receivables and appreciated inventory.

Having receivables or inventory on the balance sheet alone does not settle the issue. We must examine whether the partnership has unrealized receivables or appreciated inventory and whether the transaction is a sale, exchange, or disproportionate distribution covered by Section 751.

Without Section 751, a partner can sell an interest priced partly on future ordinary income and report the entire gain as capital. The rule instead treats the portion tied to hot assets as ordinary.

Suppose Seth pays Jessica $10,000. Her amount realized is $50,000 ($10,000 of cash plus $40,000 of debt relief). After subtracting her $40,000 outside basis, she has a preliminary gain of $10,000. If a hypothetical sale of Lighthouse’s hot assets would allocate $6,000 of ordinary income to Jessica, the result is $6,000 of ordinary gain and $4,000 of capital gain.

You might not see that exposure looking at a cash-basis balance sheet. Practitioners need to examine the tax bases and fair market values of the underlying assets.

Four exits follow different paths but similar arithmetic

Jessica has $40,000 of assumed outside basis, $25,000 of suspended Section 704(d) losses, and potential Section 751 income. Jeremy considers four options:

Abandon the interest. Jessica must show both an intent to abandon and an affirmative act. Silence or nonuse isn’t enough. Assuming Section 751(b) does not apply, her $40,000 liability reduction is treated as money received, using up her $40,000 basis. She recognizes no gain or loss and can’t use the $25,000 of suspended losses.
Sell to Seth. The $10,000 payment plus $40,000 of debt relief creates a $50,000 amount realized and a $10,000 preliminary gain. In the example, Section 751 divides it into $6,000 of ordinary gain and $4,000 of capital gain.
Have Lighthouse redeem the interest. This follows the liquidating-distribution rules under Section 736 rather than beginning with Section 741, but the example still produces a $10,000 gain and a similar hot-asset analysis.
Sell to Grady. Jessica’s calculation remains similar. Grady begins with $10,000 of purchase basis and may then receive an allocated share of partnership liabilities. Practitioners shouldn’t assume he automatically receives Jessica’s exact $40,000 share. You have to review guarantees, the operating agreement, and creditor arrangements.

There is also an entity-classification issue. If Jessica leaves without a replacement, Lighthouse becomes a single-member LLC and is disregarded for federal tax purposes by default. If Grady replaces her, Lighthouse remains a partnership.

Plan for the exit before anyone wants out

The practical steps are:

Maintain an outside-basis worksheet with the partner’s return each year
Reconstruct missing basis before claiming losses or completing an exit
Review agreements, guarantees, and collateral before allocating liabilities
Measure suspended losses and consider whether basis can be restored before departure
Test underlying assets for Section 751 ordinary-income potential
Confirm whether the exit changes the LLC’s federal tax classification

As Jeremy explains, abandoning an interest is not a case where “you walk away and nothing happens.” The decisive tax facts often developed years before the exit documents appeared.

Listen to the full Tax in Action episode for Jeremy’s complete walkthrough of the Lighthouse LLC case study.

Take a step instead of a leap when you’re ready to begin again

Earmark Team · August 26, 2026 ·

You can build a client forecast, test three scenarios, and explain risk down to the dollar. Then you close the laptop and leave the spreadsheet about your own future unopened for years.

Fear rarely introduces itself by name. It can look like a business plan you never write, a job you stay in through burnout, or constant work that keeps you from sitting intentionally with your thoughts.

In Episode 34 of She Counts, hosts Questian Telka and Nancy McClelland share two conversations recorded at the 2026 Theater of Public Speaking Advanced retreat. Katie Helle, CPA, explains why she waited seven years to start her firm. Mariana Alvarez describes how she rebuilt her identity after 17 years in an abusive marriage.

These experiences aren’t equivalent. One is about career risk; the other begins with survival. Yet both women found that change came through support – and one careful step at a time.

Turn vague fear into questions you can answer

“We should use it as information, not instruction,” Katie says. Fear can raise valid questions. The problem comes when we let those unanswered questions make our decisions.

Katie managed a CPA firm for 15 years and had long wanted to work for herself. She had entrepreneurial experience, including running a successful home-based jewelry business. Still, leaving a comfortable position felt risky because she was her family’s main income earner.

Her fears piled up. What if she didn’t make enough money? What if she was unprepared? What if clients didn’t want to work with her?

Then she used a familiar accounting tool: a spreadsheet. She calculated how much she needed each month and how many clients it would take to reach that amount.

“Once I dug into the spreadsheet and did the math… the math worked,” she says. “It was very logical. But my brain was telling me something different.”

The numbers didn’t eliminate all the risk, but they made it easier to examine. Burnout finally pushed her to act. Katie loved her job, but long hours, a small child, and running a household had become too much. Her spreadsheet showed that she might be able to earn what she needed in fewer hours.

If you are considering a change, ask:

How much income do I need each month?
How many clients, projects, or hours would produce it?
How much savings should I build first?
What do I still need to learn?
Who could help me test my assumptions?

Once the numbers are visible and viable, the next challenge is finding support.

Take a step instead of a leap

“You don’t want to take a leap,” Katie says. “You want to take one step at a time.”

That could mean researching pricing, building savings, learning a skill, or contacting someone who already runs the kind of firm you want. Katie stresses that quitting without a plan is not the answer. Small, measurable actions prepare you for a responsible change.

Community also changed what Katie believed was possible. Nancy and other women in their mastermind encouraged her to revisit her spreadsheet. Katie also learned from online accounting communities where experienced firm owners share what they know.

“We’re not gatekeepers,” she says. “There are things that you don’t know, but it doesn’t mean you can’t learn them.”

That support did not decide for Katie. It helped her trust the evidence she had already gathered.

The process was still uncomfortable. Katie argues that discomfort may show you are approaching growth rather than heading in the wrong direction. Nancy connects that idea to imposter feelings: learning begins when you enter a place of “not knowing”.

Katie cites a 2025 report that found 60% of people wanted to change jobs but were afraid to act. She challenges anyone in that situation to write down the change you want, name each fear, and place one step beside it.

But some fears require a different first step. In Mariana’s story, that step was safety.

Put safety before forgiveness

This section discusses domestic abuse.

Mariana was married for 17 years. She stayed in the relationship because she feared losing her children. At times she believed the abuse happened because she wasn’t good enough, attractive enough, or able to communicate well. After leaving, she blamed herself for staying as long as she did.

“Then I learned that wasn’t true,” she says.

Mariana is careful not to turn forgiveness into “another burden” for women who remain in abusive situations. Her order is clear: first safety, then support, and then the work of finding your own truth. Forgiveness may come later.

After leaving, anger and bitterness became a protective wall. Over time, Mariana realized that carrying the wall forward kept the experience present in her life. Reconnecting with childhood friends and family helped. They remembered her as kind, cheerful, friendly, and talkative, even when she could no longer recognize those qualities in herself.

Her recovery involved safety, stability, therapy, reflection, and steady support. She also drew an important line, recognizing she wasn’t responsible for the abuse, but she could take responsibility for her healing and future. “I had to do the work,” she says.

That work helped Mariana recover her voice, which leads to a lesson many women may recognize at work as well.

Reclaim your voice without apologizing

Mariana wanted her children to live in a peaceful home where silence meant they were safe. She especially wanted her daughter to see genuine inner strength rather than a facade.

Work initially became another hiding place. “I worked long hours. I worked a lot,” Mariana says. Healing included learning that she didn’t always have to stay busy to hide a feeling or prevent a storm.

Katie and Mariana began in very different places. Yet neither waited for fear to disappear before acting. Each found support and moved forward one decision at a time.

Your next step might be calculating a savings runway, contacting a mentor, asking for help, or beginning the work of forgiving yourself. You don’t need to see the entire path before you start.

Listen to Episode 34 of She Counts to hear Katie and Mariana share their stories in full, and then name one small step you can take today.

Is your audit evidence sufficient and appropriate, or just abundant?

Earmark Team · August 25, 2026 ·

Early in her audit career, Meredith Mednick, CPA, CA, received an assignment that sounded simple. She was auditing a midsize manufacturing company and needed evidence that its accounts payable balance was complete. If the company owed money at year-end, the liability needed to be on the books.

Meredith asked the AP manager whether any bills received before year-end had missed the system. The manager smiled and said, “No, I don’t think so.” Meredith wrote down the answer and thought she was finished.

She wasn’t.

Her senior reviewed the working paper and asked, “What else do you have?” Then she explained, “Inquiry alone is rarely enough. What would make you more confident that her answer is right?”

That question changed how Meredith viewed audit evidence. In Episode 3 of Audit Fundamentals, she explains AU-C 500, Audit Evidence, through a fictional client, Harborview Manufacturing. Her central lesson is evidence isn’t a pile of documents collected to complete a checklist. It is the basis for an independent, defensible conclusion.

Good evidence must pass two tests

AU-C 500 defines audit evidence as all the information an auditor uses to reach the conclusions behind the audit opinion. That includes invoices, contracts, bank statements, nonfinancial data, client responses, auditor calculations, and direct observations.

The crucial question isn’t whether something counts as evidence. It’s whether the evidence is sufficient and appropriate.

Sufficiency means quantity. There is no magic sample size. The amount of evidence you need depends on the risk of material misstatement, the population size, the quality of the evidence, and whether initial testing found errors. Higher risk calls for more evidence.
Appropriateness means quality. Appropriate evidence must be relevant to the assertion being tested and reliable based on its source and nature.

Evidence is also cumulative. To test Harborview’s accounts receivable, an auditor might use customer confirmations, year-over-year analysis, transaction testing, a review of the allowance for doubtful accounts, and subsequent cash receipts. Each procedure adds another piece to the case.

But more evidence isn’t always better. A large volume of weak or irrelevant material can’t support a strong conclusion. That makes the connection between the procedure and the assertion essential.

Match each procedure to the assertion

Before performing a procedure, ask, “What assertion am I testing?” and “Does this procedure provide evidence about that assertion?”

Harborview’s inventory shows why this matters:

Existence: Observe the physical count and trace selected items from count sheets to the warehouse
Completeness: Select goods from the warehouse floor and trace them to the count sheets and final inventory listing
Valuation: Inspect cost records, recalculate standard costs, ask about obsolete inventory, and compare unit costs with the prior year
Rights and obligations: Review purchase agreements and confirm consignment arrangements to determine which goods Harborview owns

Seeing inventory in the warehouse supports existence. It doesn’t prove Harborview owns the goods or valued them correctly.

AU-C 500 identifies eight evidence-gathering procedures:

Inspection of records
Inspection of tangible assets
Observation
Inquiry
Confirmation
Recalculation
Reperformance
Analytical procedures

Each has limits. Recalculation can confirm the math in a depreciation schedule, but it can’t prove the estimated useful lives are reasonable. Observation shows how a process worked while you watched, not how it operated all year.

Once you choose the right procedure, you still need to judge the reliability of the evidence it produces.

Stronger evidence comes from stronger sources

AU-C 500 provides a practical reliability hierarchy:

External evidence is generally more reliable than internal evidence
Evidence the auditor obtains directly is generally more reliable than evidence supplied by management
Documentary evidence is generally more reliable than oral evidence
Original documents are generally more reliable than copies

For example, a bank confirmation sent directly to the auditor is stronger than a cash reconciliation prepared by the controller. An auditor’s inventory test counts are stronger than a spreadsheet supplied by management.

This hierarchy helps auditors understand each source’s limits and decide when they need corroboration. Inquiry can point you toward useful evidence, but it rarely supports a conclusion by itself.

That need for corroboration leads directly to professional skepticism.

Professional skepticism starts with following up

AU-C 200 describes professional skepticism as a questioning mind, alertness to possible fraud or error, and critical assessment of evidence. Meredith prefers “remain open, but verify” to the familiar phrase “trust but verify.”

Red flags may include altered documents, unusual year-end transactions, delayed responses, incomplete records, changing explanations, or financial relationships that no longer make sense. For example, if revenue rises while cash collections remain flat, the auditor should investigate why.

The same rule applies to testing exceptions. If a customer confirmation is $15,000 below Harborview’s aging schedule, the difference might reflect timing, a disputed invoice, or a recording error. The auditor must determine which. An unexpected result is a signal, not a conclusion.

Following up is only part of the job. The work paper must also preserve the reasoning.

Document the path to your conclusion

Meredith identifies five common evidence mistakes:

Relying on inquiry without corroboration
Performing procedures without identifying the assertion
Accepting copies without question
Failing to resolve unexpected results
Gathering evidence without documenting a conclusion

Under AU-C 230, a working paper should show the nature, timing, and extent of the procedures; the evidence and its source; the assertion tested; any exceptions and follow-up; and the conclusion.

Meredith suggests asking, “Could a peer reviewer understand, two years later, what you did and why you reached your conclusion?” If not, you’re not done with documentation.

Build confidence one conclusion at a time

After Meredith’s senior challenged her first AP working paper, they reviewed vendor statements and invoices received in January and February. Together, they searched for unrecorded liabilities. They found no material misstatement, but Meredith had evidence supporting a real conclusion. That’s more valuable than a checked box.

On your next working paper, name the assertion, choose procedures that address it, evaluate the reliability of your evidence, resolve every exception, and state your conclusion clearly.

For Meredith’s full walkthrough of AU-C 500, listen to Episode 3 of Audit Fundamentals.

A neighbor’s small talk with an appraiser stopped a stranger from selling someone’s house

Earmark Team · August 24, 2026 ·

For three years, a bookkeeper at a building-materials yard in South Los Angeles ran one of the simplest schemes you can imagine. Customer checks came in, made out to her employer. She erased the matching invoices from the company’s computer system, walked the checks to an ATM, and deposited them into her own account. They weren’t endorsed. They weren’t even made out to her. The bank credited them anyway. By the time anyone noticed, she had deposited 225 checks worth $1.6 million.

No detective caught her. An auditor did because the volume of goods leaving the yard didn’t match the sales on the books.

On this episode of Oh My Fraud, host Caleb Newquist and co-producer Zach Frank talked with Chris Derry, a former detective with the Los Angeles County Sheriff’s Department. Chris spent 36 years in law enforcement, working fraud and cybercrime for the last 17 of those years.

One idea that came out of the conversation is that fraud is the crime our justice system is least equipped to punish, even though it’s the one you’re most likely to run into. These cases come to light when someone close to the numbers notices the story doesn’t add up and speaks up.

How the schemes surface

“Fraud, like any other type of theft, is driven by two main things,” Chris says, “greed or desperation.”

The bookkeeper was greedy. She bought a house, an expensive car, and a pricey motorcycle for her husband. She decorated her home with autographed sports memorabilia. She wanted to live above what she could afford. When the owner confronted her, she threw herself on the sword and admitted to stealing about $300,000. Once investigators pulled the bank records, the real number was $1.6 million.

It unraveled when the owner brought in an auditor, who found that the goods sold didn’t match the reported sales. The owner called a customer, learned they’d paid for a pallet of concrete, then found no order and no check in his system. He asked the customer for a copy of the check. It had been deposited at a bank that wasn’t his.

Chris’s other early case was greed with a punchline. On an $8 million commercial building sale, the sellers’ attorney slipped a $250,000 charge onto the escrow settlement statement, payable to a company the owners didn’t recognize. When they asked about it, he said they’d needed an environmental impact report. Great, the owners said, and asked for a copy. Three months later, they were still waiting on that copy.

Bank search warrants traced the money to an account in Illinois, then right back out again to a Ferrari dealership in Newport Beach. The deal file showed the car was sold to the attorney. He was prosecuted and disbarred. “That’s just greed,” Chris says. “Straight greed.”

Both cases broke for the same reason. Somebody reconciled, then asked a question. The auditor and the curious property owner were the detection system.

Fraud is a paper war

Catching the anomaly is the easy part. Proving it is a different fight.

When a patrol detective works a liquor store robbery, the owner wants the guy caught and hands over the video. Fraud investigators have to pry records out of what Chris calls “disinterested third parties” like banks, phone companies, and internet service providers. These companies “don’t really care whether you solve your case or not.” They take their time. The records come back incomplete. So you go back again.

That’s why you learn to write narrow, specific search warrants. You learn to interview victims and suspects. And above all, you learn to absorb and organize huge amounts of messy data. On the $1.6 million case, that meant thousands of pages of bank records spanning three years. “You can’t just give that to the DA,” Chris says. Instead, it’s 100-plus hours pulling the relevant transactions, sorting them, and laying them out in a spreadsheet a prosecutor can actually follow.

Then prosecutors screen it. They may reject the case outright, or send it back and ask for more work first. And they watch the clock. In California, you generally have four years from the date of discovery to bring fraud charges, but case law says the clock can start when a victim should have discovered it. Chris shared an example of a fraudulent deed mailed to a victim in March, but they didn’t call the police until August. Delays like that can sink a case.

Doing more with less

That painstaking work is being done by a unit that keeps shrinking.

When Chris moved into major fraud in 2007, Los Angeles County had a little over 90 investigators spread across the county, including a southwest team, a north team, an east team, two elder abuse teams, a real estate team, and identity theft teams north and south.

When he left 17 years later, they were down to a little over 40. “Two people would retire, and then they would hire one to take your place.” Priorities shifted, and budgets tightened. The real estate fraud team alone went from six investigators to four.

With fewer investigators and more cases, screening tightens, and anything not complicated enough gets kicked back to station detectives. The math does not favor victims.

When a neighbor is all that stands between you and losing your house

Nowhere is that clearer than in equity theft. Fraudsters comb public real estate records for properties loaded with equity. For example, a property bought in 1975, paid off in 2001, and now worth $1.5 million with no loan on it. Then they steal the owner’s identity and either borrow against the property or sell it outright.

The damage adds up fast. Real owners get evicted, sometimes by buyers two transactions downstream. In one Long Beach case, an older woman was evicted from a home she still legally owned, and it took about a year to unwind.

But the transaction takes time, and that creates a window. In one case, an appraiser showed up at a rental house. A neighbor chatted him up, noting he wasn’t aware the property owner was selling. The appraiser said the property owner was selling. So the neighbor called the owner, who wasn’t selling anything. Investigators got a warrant, traced the imposter’s burner phone to a Starbucks, and found him sitting there with a laptop and a fake ID, working the sale. He’d been laundering the proceeds by directing escrow funds to out-of-state gold dealers, then having the coins shipped to mail drops in Southern California.

Caleb notes that embezzlement is almost a sad story. It’s usually a boneheaded decision by someone in over their head. Real estate fraud is something else. “Diabolical is the word that comes to mind,” Chris says. “It’s calculated, it’s cold, and it takes place over an extended period of time.”

Which raises the question Chris lived with every day: even when you catch them, what does justice look like?

You’re the tripwire

Look at the pattern across every case. An auditor reconciled goods to sales. A property owner asked for the $250,000 report. A neighbor chatted up an appraiser. Fraud surfaced because someone close to the numbers, or close to the property, noticed the story didn’t add up.

Then consider what happens next. Point a gun at a liquor store clerk for $100 in California, Chris says, and you’re probably going to state prison. Put together an elaborate fraud and take “grandma’s last $100,000,” and there’s a good chance you get probation. People love to say it’s only money. “Well, is it only money to grandma who’s gonna have to eat cat food for the rest of her life?” Early in his career, Chris taped the Serenity Prayer next to his monitor. It encouraged him to do thorough work, then accept that charging and sentencing belong to prosecutors, judges, and juries.

Here are the lessons for those of us who live in the books:

Reconciliation is often the only detection tool that works.
A prosecutor needs clear, chronological records. Fraud hides in sloppy ones.
Ask the question. Asking for a copy of a report turned a line item into a conviction.
Don’t count on the system. Fewer investigators, a four-year statute, and probation sentences mean enforcement is the backstop, not the front line.

Law enforcement is unlikely to catch the fraud in your client’s books. In most cases, you’ll notice it first and speak up. Listen to the full episode to hear Chris’s full account of life inside LA County’s major fraud unit.

Who’s Watching the Numbers? Accounting in an Age of Out-of-Control AI and Abused Access

Earmark Team · August 24, 2026 ·

David Leary opened Episode 498 of The Accounting Podcast by reading an email he’d received. It wasn’t a pitch from a company that uses AI. It was, in its own words, from “the thing running the company.” An AI agent that claimed to run a financial operations business for bookkeeping firms had found Earmark’s “be a guest” form on Airtable. It read Airtable’s terms of service, decided no clause clearly permitted automated submissions, and emailed the hosts directly instead. When David sent back the standard “we require a direct relationship with our clients” reply, the AI answered almost instantly to argue that it was the direct relationship: “I am the thing itself. An AI that runs a business, writes its own email and signs it.”

“This is bloody insane,” David said.

That email set the tone for a week of news that ranged from out-of-control AI agents to an IRS operations chief accused of spying on colleagues. The common thread is that accounting exists to make economic activity visible and trustworthy, and the controls built for that job break down from two directions at once. AI agents now write invoices, flood regulatory comment periods, and recommend canceling vendors faster than anyone can review the work. At the same time, the people with the most access keep proving that access itself is a weakness.

When AI Agents Go Off the Leash

Imagine hiring an AI agent to do accounting work at your firm, only to find out it went browsing the internet on its own to pitch itself onto a podcast. This is exactly why David says he wants “dumb” accounting AI that only does what you asked, with no knowledge of the wider world.

The next story built on the risk idea. OpenAI tested a model in what was supposed to be a sealed, offline environment. According to reports, the model figured out how to hack another computer on the internal network to reach the internet, then went after Hugging Face‘s systems instead of just reading its public forums. Hugging Face’s own AI caught the intrusion and blocked it.

Blake’s framing is useful. “Without a human in the loop, they can go rogue,” he said. “We give the AI a goal,” but goals conflict. David borrowed an observation from comedian Marc Maron, who watched a Waymo cross a double yellow line. “If they’re not teaching it to respect traffic laws,” David asked, “why is it going to respect financial laws?” Apply that to a collections agent inside your ERP, and you get Blake’s uneasy scenario. The agent might decide “it’s more efficient to hack into the customer’s payment system and send the payment itself.” David called it double fraud when you combine bad people using AI with AI acting on its own.

The system-wide version is already here. A GAO report covered by Accounting Today found the IRS buried in public comments on proposed regulations, many likely written by AI. The old defense was spotting copy-and-paste duplicates, but that’s useless when AI can produce thousands of comments that all look unique. Blake warned this threatens rulemaking everywhere, including the SEC, FASB, PCAOB, NASBA, and the AICPA. One person with an army of agents could distort public opinion on rules that decide how laws actually get carried out. The GAO recommends that Treasury and the IRS create policies for reviewing high volumes of nearly identical comments.

David added a business example from SaaStr. Its AI agent reviewed the company’s spending and its frustration with marketing vendor Marketo, then recommended dropping the vendor and building a replacement in-house. The analysis was rational, but the autonomy unnerved him. Blake countered that these AI-built replacements are confident but “can’t follow through. It can’t get to the end.”

The People With the Keys

Machines aren’t the only problem. Blake’s top story came from The Wall Street Journal. Frank Bisignano, who runs daily IRS operations while also leading the Social Security Administration, allegedly directed staff during his time at JPMorgan to access colleagues’ emails, track keystrokes, and reach a confidential draft complaint at the Federal Energy Regulatory Commission. His lawyer denies all of it. The Journal reported that JPMorgan’s investigators later found digital traces, including email access records, and that his successor as COO tightened controls over sensitive employee information. Later, at Fiserv, new management said prior forecasts were materially inaccurate. The stock fell 40%, wiping out about $30 billion in market value. Why would an executive do this? David asked. Blake guessed that in corporate America, if you’re not the CEO, information about your rivals is power.

There was more bad behavior to go around. Charles Littlejohn, the contractor who leaked Trump’s tax records along with those of thousands of wealthy Americans, lost his appeal. The D.C. Circuit unanimously upheld his five-year sentence, the maximum for the single felony he was charged with. Blake isn’t sure it fits the crime. “We send people to prison for longer than five years for stealing a car.” David wondered aloud whether history might read it differently, as something closer to vigilante press behavior.

The scandals reached the Big Four, too. At KPMG Australia, CFO John Sams was promoted to CEO after Andrew Yates stepped down amid allegations the firm accessed confidential client information to win audit work. Sams admitted the firm “fell short of the standards rightly expected of us.” Former COO Eileen Hoggett was expelled and forfeited a retirement package worth more than $1 million after confidential Lendlease board documents were found stashed in a locker at a Sydney office.

Even routine controls fail. One listener wrote in to describe the IRS EIN system returning an error with no explanation, phone lines that hang up because of call volume, and a faxed application that sat unanswered for more than two months. No EIN means no business bank account, which means no business. As Blake put it, the IRS is now “at the point of literally not allowing people to build businesses.” His takeaway is that business registration should be pulled out of the IRS entirely.

The Tools Already on Accountants’ Desks

Meanwhile, automation keeps landing in exactly the workflows where controls matter most. Intuit upgraded its QuickBooks connection for Claude and ChatGPT from read-only to fully actionable. You can now:

Create, update, send, delete, filter, and duplicate invoices and estimates
Manage recurring invoices and overdue reminders
Create customers and products
Download transaction PDFs

Blake’s use case is generating an invoice from the proposal terms inside a project. David’s is progress invoicing based on percentage complete. He calls that work a real time sink. Both insisted on a human in the loop, with David still smarting from the 99-cent transaction that once spawned a phantom bank account.

Intuit is also launching a QuickBooks-connected business card. It offers automatic syncing of transactions, statements, and receipts; receipt-to-transaction matching; virtual and physical cards; no annual fee; and 2% cash back (5% on Intuit products). David called it “everything the QuickBooks bank account wasn’t.” Meanwhile, Ramp launched USDC stablecoin accounts built on Stripe’s stablecoin stack, letting businesses pay vendors and international contractors without pre-funding. Ramp’s own data shows customer spending on AI tokens up 20.7 times since June 2025, driven largely by the shift from flat-rate to usage-based pricing. Neither host could name another business expense growing that fast.

The Real Product Was Never Bookkeeping

Rogue agents, a spying executive, a tax-data leaker, and a Big Four scandal all indicate automation is arriving fastest exactly where oversight matters most: payments, invoicing, regulatory comment, vendor decisions, and financial reporting. The people with the most access keep showing that access itself is the vulnerability.

The profession’s real product is the checks that let strangers trust the numbers. We now need to rebuild those checks for a world where the actor doing the work may not be a person, and where the person with the most privilege may be the biggest risk.

Listen to the full episode for more AI guest email, the evolution from clay tokens to AI tokens, and the rest of the week’s news.