Can you trust your numbers?

We feel it is time to shine a light on the murky world of what accountants do for a set of accounts and why not all accounts are equal.  Business owners need to know.

When we take on new clients, there is a transfer of information from the previous accountants.  At this point you start to see the work they have done and what you hope is that everything is ship shape, but sadly all too often what you discover is a can of worms.

What is supposed to happen

Checking the bookkeeping

Bookkeepers are dealing with thousands if not tens of thousands of transactions.  It is not surprising therefore that some go awry.  One basic function of the accountant is to review the books and try to spot the obvious mistakes.  

Reconciling the Balance Sheet

One of the best ways to check if the bookkeeping is correct is to reconcile the balance sheet for example checking that the list of outstanding bills really is correct, that payments to HMRC have been posted to the right tax liabilities (VAT, PAYE etc).  Even a simple thing like checking the bank balance can shed light on inaccuracies.

At this point it is usual to uncover some issues to sort out.  Perhaps there is a good reason why someone’s wages was underpaid one month.   Often there is something to pass on to the business owner that needs dealing with.

Year end adjustments

A key accounting principle is that you align income and expenditure that goes together into the same period so you can see a true reflection of profit.  For example if you took a deposit for a piece of work that will be delivered in the next year we should record that as income in advance rather than including it in sales.

Posting changes back into the bookkeeping

The software used to do the work above is often not the same software as the bookkeeping.  At the end of the process, you have two different sets of figures and the accountant needs to bring the two systems into alignment by posting changes back into the bookkeeping system.

What can happen

The first thing to understand is that accounting is not a regulated profession.  It is possible to trade as an accountant without any qualification and that means the person doing your accounts may not know how things are meant to be done.

Then, sad to say, but not all qualified accountants are following the process either.  Most business owners have very little idea what should be done, many pay very little attention to the outcome.  The work obviously takes time, the accountant, especially if they have not charged enough now has a big incentive to cut corners.

In the most extreme cases we have seen, the accountant has simply taken the raw data out of the bookkeeping software, put it into Statutory Accounts and done nothing in between.  

In the worst we have seen, a £30k+ liability was missing from the numbers.

Cans of Worms

One of the problems with this dynamic is that as long as no-one is taking too much interest in the numbers, there may be no problem.  However anyone taking a real interest in your numbers will start to uncover problems that may have real consequences for your business.

HMRC is obviously one party that could dig into the numbers and investors are another.   The numbers also may be completely skewing the picture of profitability of the business.

Without numbers you can trust, business decisions get more difficult to take.

Our Recommendations

An obvious recommendation from this is to engage qualified accountants.  Another good sign of the quality of work you will get is the price you are being charged.  Sometimes when we see what other accountants charge for a set of accounts it is clear the only way they could make money is by ignoring the annual accounts process.

Finally we would encourage business owners to pay attention to the numbers they are signing off.  Company Directors sign a declaration that the numbers are a ‘true and fair’ representation of the finances of the business.  That doesn’t mean they need to understand everything the accountant has done but it should mean they trust the work that has been done.

The word ‘account’ derives its meaning from the idea of describing what happened, like the witness who provides their account.  If your accountant can’t tell you how they got to a number, you know you have a problem.