If any of you spent the last couple weekends on the couch recovering from a long week, you’ve probably been watching Netflix’s wild true crime documentary “Bad Vegan,” which checks all the boxes: Cult of Personality, Fraud, Gambling, Angels, Domino’s Pizza, & Accounting.
The story is about the owner of a Union Square based Vegan restaurant called “Pure Food & Wine Restaurant” owned by celebrity chef, Sarma Melngailis. A popular haunt among weird celebrities, the restaurant enjoyed a significant amount of financial success in its first years, despite being highly leveraged due to a costly partner buyout. At one point Sarma is bringing in nearly $7m a year in gross revenue. Things start to take a strange turn when Sarma starts dating Anthony Strangis- a man she met on twitter and deepened her relationship with on Words with Friends. I won’t spoil the plot, but Sarma ends up handing over $1.7 million to Anthony Strangis and leaving the government, her employees, and investors out in the cold to the tune of $6.14 million.
By the time the credits are rolling, I am actively yelling “Where the #$%! Is Pure Food & Wine’s accountant?!?!?!” Perhaps the most vexing question that this show doesn’t ask. Sarma has a number of investors even taking on ANOTHER round of investment in the midst of this scandal. The fact that investors took Sarma’s word after being burned once is absolutely galling. The fiscal irresponsibility here is stunning on so many levels.
So, this begs the question: “How could a good accountant have helped Melngailis avoid this entire fiasco?”
Note: When I say “accountant,” I don’t mean that guy you see once a year to do your taxes. That’s a CPA or EA. An accountant (or bookkeeper) is someone who records all your financial transactions for the other 364 days of the year. It's an important distinction. If you don’t have one of those… well… watch Bad Vegan.
The famed vegan “lasagna”
Adhering to the Operating Agreement
An operating agreement is the constitution of your business. It sets the rules for how the business is run. It's a critically important document that discusses who’s in charge of the books, who runs the business, and how the profits get split up. It’s noteworthy that she had investors, as that usually means that there is some sort of breakdown of how the profits are split up (usually by a percentage of the total money invested in the business).
Rich folks & banks don’t just give you a wad of cash because they enjoy your vegan lasagna (which by the way, looks horrific). They invest because they want a return on their investment. In short: they want to make money. Investors also don’t appreciate it when they see one partner of the business making significantly more than what the operating agreement says, which is what makes this story so strange from an accounting perspective. If the investors were receiving regular reporting from the accountant, they surely would have noticed this massive discrepancy. Which brings me to my next point…
Regular Reporting
Part of having investors is keeping them informed of what is going on with the business. Operators don’t generally like having someone else have a say in their business. However, unless the operator has enough cash on hand to open the business themselves, that’s just the way it has to be. One of the worst things an operator can do is try to keep an investor in the dark. It's the easiest way to get yourself booted out of your own restaurant, or be sitting across the table from an attorney from a law firm that costs $3,000 an hour.
Operators should be closing books on a monthly basis, and reporting the performance of the business on a monthly, or at least quarterly, basis. Even better, there should be a regular meeting with investors to answer any questions or concerns they may have. Although these investors' questions you may find uncomfortable, it’s certainly better than facing down the investor’s version of Thor’s Hammer: their attorney James from Pavalock-Bagarose-Pikula-Whitney & Hammersmith. An internal or external accountant can prepare these investor documents on a regular basis, and when Sarma’s distributions started to pull away from the rest of the partners in relation to her percentage of ownership, red flags should have been going through the roof.
Control Over Cash Flow
Possibly one of the best things that a business with investors can do is to have a 3rd party responsible for cash flow. It takes the temptation away from operators to spend, or to focus on the cash flow, and instead focus on the operations of the business. It's a very freeing prospect to operators, and it's a comforting setup for investors knowing that the money is in capable hands.
Fiscal Responsibility
Throughout the series, viewers watch Sarma initiate dozens of wires, ranging from $10,000 to $190,000 per wire. Part of the job of an accountant is to keep track of the support for financial transactions. The IRS requires proof of all transactions over $75 which these wires most certainly were. An accountant would have discovered that these transactions were being sent to either the casinos or to Strangis himself, and like the Kool Aid man, James from Pavalock, Bagarose Pikula Whitney & Hammersmith would have been kicking down the door to Pure Food & Wine Restaurant.
It is also worth noting that accountants have a fiduciary duty to report any accounting irregularities to investors, or to the government. Frequently, when you see a whistle-blower case, you’ll note that the employee is an accountant.
Antony Strangis’ “Power Meeting” would not have worked
There was this one bizarre moment in the series when Anthony Strangis (now Sarma’s husband) says that he has taken over the company, that the investors have been paid off, and that all decisions need to go through him. His confidence seems to at least reassure employees enough for them not to question it. Had an accountant been in the room, the meeting would have gone over as well as a screen door in a submarine. The accountant would have had so many immediate questions that would require proof that would have turned Anthony’s plan to dust.
“Where is the purchase agreement?”
“How were the other investors paid? Please provide proof”
“Where is the new operating agreement?”
Any one of these questions would have an immediate impact. Accountants are a fickle, and distrusting type, and we don’t take anything at face value. It’s nothing personal, but its reasons like this that we have this distrust so deeply entrenched..
Sarma Melngailis ended up costing the government, employees and her investors over $6 million. This all could have easily been avoided had she just hired an accountant. Good accounting can be pricey, but at the end of the day, it's a far lower price than poor accounting, or no accounting.