Previous accountants negligence

Previous accountants negligence

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Previous accountant has under declared income for our new client. It's looking to be around £14000 of unpaid tax.

Client is in favour for claiming on old accountants insurance for negligence, but to what extent of costs is the old accountant liable? Is the tax underpaid claimable? Or is it limited to interest, charges and our fees in dealing with the case?
Leeroy

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By Ned Ludd
23rd Jan 2009 17:54

update
almost a year elapsed

any update?

what transpired?

personally i hope the case was thrown out as it seems impossible to establish whether in fact the client provided all info.

just because it was supplied one year does not mean it was supplied in its entirety for another year.

likewise a letter "returning all statements, cis vouchers etc" does not mean they were all provided in the first place. I take the accountants letter to mean he was returning all the records supplied to him which may well have been incomplete.

as a footnote i must say that subcontractors within the construction industry scheme are notoriously bad record keepers, hence the scheme!

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By User deleted
28th Feb 2008 11:17

Thanks Mark
Old accountant is ICAEW. HMRC have gone back to 03/04 and every year has a under declared sum. This suggests to me that he hasn't reconciled at all to the CIS for those 3 years.

There is no implication of a last minute rush as the books are always handed over in May following a March year end. There is a concern that this has happened to more of the accountants clients. I don't want to look like a "tell-tale", but surely this is incompetance or a failure to review juniors work? How would the ICAEW look at me as a member ratting on another member?

Spoke to client yesterday, said they were adament that they always gave all the information over. They are not sure whether or not to go down the legal route. Although we have yet to argue over the interest and charges (may be £2000), if money wasn't an issue, is this the right way to go?

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By carnmores
20th Feb 2008 19:14

lets hope that you are right
!

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By User deleted
20th Feb 2008 18:32

Thanks Anthony
I'll have a good look at those. The client has to rely on the advisor, the client hasn't had years of accountancy training.

Regarding the debtors: I was hoping that this was the case but I've gone back 2 years and the invoices have definately been missed off.

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By tonysyms
20th Feb 2008 17:45

YEAR END DEBTORS
Have you reviewed whether any invoices were raised in one year with the CIS vouchers dated in the next year.

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By AnonymousUser
20th Feb 2008 12:54

Penalties where taxpayer negligent
Just a thought but Leeroy might be interested to look at the Special Commissioners decision in Rowlands v HMRC (2006) SpC 548, where the Commissioner held that the taxpayer's reliance upon a third party (her advisers) could be a reasonable excuse. Penalties are imposed where the taxpayer is negligent. It may be possible to argue that, through reliance upon his adviser, the client was not negligent and thus should not be subject to penalties.

See also HMRC instructions at EM5125 where HMRC conclude that "We can assume that a reasonable man would, amongst other things... seek professional help with matters, such as the preparation of accounts, which he is unable to cope with satisfactorily himself. "

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Chris Caspell CTA TEP
By ccaspell
18th Feb 2008 17:12

Balance of probabilities...
In response to David's message of 15th I completely agree that the probabilities need to be weighed. We do not have enough information to make any real decision either way. We do know however that people lie to get themselves out of trouble - both accountants and clients.

If the client says one thing and the accountant the opposite then these two things will cancel each other out effectively. If there was no other evidence then it would be simply one person's word against the other and it is unlikely that any court in the land would convict.

But there ought to be other evidence of the work done. The should be accounts files and workings. It is questionable whether not asking for VAT returns is negligent or not. Does the trader have a balance sheet? If not, and the accountant is not tasked to prepare VAT returns and is not supposed to audit the business why should he ask for them?

As David has said the old accountant needs to show that he used the documents and information received and prepared the accounts with reasonable care. What is 'reasonable care'? It is the care that any reasonable accountant would take in the same circumstances - no more nor less than that.

At the end of the day I think that this case will rest much more upon what should have been done by the accountant rather than what information was received by him. If, in these circumstances (to be truthful quite unknown to us) the accountant should have known better or asked for more information then there will be a case if not then I really don't think the client has much of a chance here - not because I am an accountant am taking sides but simply based on the evidence placed before me.

More as a PS - it is very interesting to hear people's views on this - there has certainly been enough responses. I am not sure that the posters here are "doggedly determined" to blame the client - more seeking more information than is currently available. Certainly I think that the outcome is far from clear cut though I do agree that in all likelihood, if there is any degree of doubt the PII will settle to try to keep it out of the courts.

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By clive griffiths
18th Feb 2008 13:44

So.........
....what if anything has the previous accountant actually said? Can the client verify that all records were provided to the previous accountant, and if so, how can he verify that?

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By User deleted
16th Feb 2008 22:33

Clients VAT records
Client produces own VAT. The accountant has to be at fault as all info was supplied, no reconciliation was performed with the other documentary evidence.

The client is sound. Pays by return, keeps all records, supplies any information quickly eg bank interest.

The CIS dept. at HMRC spotted this when reconciling the vouchers with the tax returns. As the David's post stated, "A reasonably careful and competent accountant would surely have extracted the details from the CIS vouchers". If the old accountant had have spent 30 minutes doing this, 1) HMRC would have found nothing, 2) tax would have been paid correctly.

I cannot see how the old accountant can be defended and will instruct my client to obtain legal advice.

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David Winch
By David Winch
16th Feb 2008 15:57

I am taken aback

I have to say I am taken aback by the dogged determination of posters to this thread to blame the client and excuse the accountant - even in the face of evermore evidence of the 'old' accountant's 'testicular elevation'!

It is quite clear that the 'old' accountant failed to produce accurate accounts from the information supplied to him.

At best, he unwisely relied upon the accuracy of the client's own bookkeeping (if we assume that the VAT workings failed to reflect the full turnover).

A reasonably careful and competent accountant would surely have extracted the details from the CIS vouchers, checked that he had the complete sequence of them, totalled up the figures (on a working paper), and compared those totals with turnover shown in the annual accounts and the VAT outputs. As there were apparently only 12 vouchers per year this exercise should not take more than half an hour at most.

Not only should this have ensured the full gross income being reflected in the accounts (and tax returns) but it would also have brought to light any under-declaration of output VAT.

The negligent accountant (or his insurer) now has to pay up for the additional costs suffered by his (ex) client as a consequence of his negligence. Anyone can make a mistake. That is why we all have PI insurance, after all.

In this particular case it is likely that the claim will be modest, no more than a few thousand pounds.

David

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By AnonymousUser
15th Feb 2008 21:42

As a matter of interest .....
As a matter of interest, how did the previous errors come to light? Also, if the income was taken from the VAT Returns then they must have been incorrectly prepared. By who?

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By User deleted
15th Feb 2008 20:51

Ummm
I have a sneeky feeling you are going to regret being involved with this client.

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David Winch
By David Winch
15th Feb 2008 18:59

Kerrching!

Leeroy

Game, set and match to the client, methinks!

Send him to his his solicitor ASAP to get a solicitor's letter off to the 'old' accountant advising him that the client will be making a claim and asking the 'old' accountant to notify his PI insurers forthwith.

David

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By User deleted
15th Feb 2008 18:52

All info supplied
I have a letter from the old accountant that states he has returned all the vouchers and bank statements for the years in question. The letter also says that the turnover was calculated from the VAT records, no mention of a CIS or bank statement verification.

The client, even by signing that the figures are correct, cannot be expected to actually check the accountants work, he must trust the accountant. The job of the accountant is to produce accurate information from the info supplied. If the info isn't supplied, surely he has a duty to ask for prime evidence (CIS vouchers/bank statements) to verify the claim of turnover, I know I would, and do.

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David Winch
By David Winch
15th Feb 2008 18:05

Response to Chris

Chris

You seem to be want to place a greater burden of 'proof' on the client than on the 'old' accountant. That is not the law. The law places an equal burden on both - it is not a matter of 'proof' it is decided on the basis known as 'the balance of probabilities'.

So if the client says he sent the relevant documents and the 'old' accountant says he didn't receive them the judge has to mentally toss a coin as to who he believes. In practice he will tend to place a greater expectation on the accountant to have records and working papers showing what he received and what he did with the information.

If the 'old' accountant can show the court that he used all the documents and information which he received and took reasonable care in preparing the accounts (which may include, for example, checking GP%age and turnover against the pattern for previous years, checking the accounts against the VAT return workings and bank account receipts and payments, and checking gross income against the CIS slips) then he should win in court.

But in practice it is odds-on that the insurers will want to settle without taking it to court because of the costs involved. So they will pay out on the client's claim.

Bear in mind that the original poster Leeroy says that the client "gave the old accountant CIS slips, VAT workings and bank statements which show all the receipts". If that is the case then (i) the 'old' accountant's working papers may well refer to the bank statements and VAT return workings (in the preparation of a bank reconciliation and control account and analysis of Input VAT, perhaps) and (ii) if all the sales are reflected in the VAT workings and bank account the 'old' accountant won't have a leg to stand on! (IMHO.)

In the alternative, if the 'old' accountant says he did not receive the bank statements or the VAT return workings or the CIS slips the court may think he was negligent in preparing accounts without first requesting / obtaining them (or at least writing to the client about the risks of error / tax investigation due to his lack of records if these were not supplied / retained).

Presumably the CIS slips would be consecutively numbered.

David

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By User deleted
15th Feb 2008 13:37

thanks all
The client did supply everything as he did to me for the latest year. He gave the old accountant CIS slips, VAT workings and bank statements which show all the receipts.

As my client said, you trust the accountant to produce accurate figures, you sign the agreement form to the accounts but you never actually see all the workings behind it all.

He, as I did, had all the information, he has clearly rushed through or not checked one to the others.

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By billgilcom
15th Feb 2008 14:03

And was........
the £14,000 tax unpaid not noticed by the client or did he contribute to any negligence signing something that he fairly knew was insufficient. With an open mind it may well suit him not to want to have anything to do with your predecessor. Seemingly he did not have a full and sequential listing of the invoices issued in the year or alternatively your predecessor failed etc etc Perhaps neither you nor HMRC will ever know the truth but clearly his/your claims that your client was not negligent - totally innocent - would have to be considered in some detail.

regards
[email protected]

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Chris Caspell CTA TEP
By ccaspell
15th Feb 2008 16:33

...beg to differ too...
While I take on board what David is saying, can the client prove that ALL the information was given to the old accountant and that this information was ignored? I doubt that he can unless he perhaps emailed the records and has a copy of the email.

In any case of the client's word vs the accountant it will be down to what any 'reasonable accountant' would do acting on the information the old accountant received, or says that he received. Does the turnover historically go up and down year on year? Put yourself in the position that, had you not received certain invoices would you have come to the same conclusion as the old accountant? Was the client registered for VAT? If so, could a reconciliation have been easily done between the VAT records and turnover which would show such underdeclared income? Were the invoices numbered consecutively and so it was clear that some were missing?

At the end of the day, if the client has signed the accounts saying that all information was provided to the accountant and the accounts were drawn up inaccordance with that information then I think that the client is on a hiding to nothing - these paragraphs are put there for a reason and if the client signs then he really needs to be careful for exactly this kind of reason.

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David Winch
By David Winch
15th Feb 2008 15:06

I beg to differ . . .

The 'old' accountant was engaged to use reasonable care and his professional skill in the preparation of the accounts and returns. If information and records were supplied to him and he prepared accounts and returns which did not properly reflect that information and those records then, on the face of it, he was negligent.

The client's duty is to supply the relevant information in full. He is not expected to understand the accounts, nor to query the (relatively low) tax bill - which he might reasonably have assumed to be the result of using a good accountant!

Being negligent the old accountant is not liable to pay the tax (because that would have been payable if he had done the figures correctly) but he is liable to pay all the additional costs incurred as a consequence of his negligence.

The client is obliged to take reasonable steps to minimise those additional costs.

So the new accountant should seek to minimise penalties and interest.

That having been done, the old accountant will be liable for all the penalties and interest, and for the new accountant's fees for dealing with the regularisation of the position.

Certainly the client should be advised to see a solicitor about making a claim against the old accountant (there are time limits, so don't delay unnecessarily).

The old accountant will also be liable for the client's solicitor's fees, for any court fees incurred in making a claim, and (if it goes that far) the fees of a forensic accountant instructed by the client's solicitors to examine the claim, and the legal fees incurred in relation to a court hearing.

The old accountant will also have to meet the costs of his own lawyers and, if necessary, his own forensic accountant (in a simple case there may be no need for this as these figures may not be disputed).

In practice, the old accountant's PI insurers should get involved almost immediately. They will normally be keen to settle at an early stage rather than incur further legal and forensic accountancy costs.

David
www.AccountingEvidence.com

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By User deleted
15th Feb 2008 13:30

.
The client would only ever have a claim for interest and penalties as the tax would have been payable anyway.

Negotiate with the Revenue to reduce the penalties down and then let the client approach the previous accountant and deal with it.

Remember that most client sign the accounts and tax returns to say they agree to the content, and most accountants reports on the accounts will say they are prepared from information supplied by the client and the client will no doubt sign to say he supplied everything, which he clearly didn’t, therefore as previously mentioned a successful outcome for the client looks unlikely.

Jason
Holden Associates
A Blog for Small Business

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By User deleted
15th Feb 2008 13:03

I agree
HMR&C will assess your client personally for underpaid tax.

You do have a potential negligence claim but in the end, the accountant prepared the accounts from the info provided to him, unless he was severly negligent. Even then the outcome is speculative & will most probably be unsuccessful.

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By User deleted
15th Feb 2008 12:34

Thanks Andy
Just needed confimation of the tax position. The clients "lost faith" in the old accountant. They did suggest that he wasn't as on-cue as he used to be - they were right.

It wasn't poor advice as such but he had left out several sales invoices (there's only about 12 per year) over the 3 year period.

The clients want nothing more to do with him and certainly didn't want him to do the investigation work.

How's the best way for them to proceed? A letter detailing the errors made and a list of charges, interest and professional fees to be repaid/claimed on insurance?

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By skylarking
15th Feb 2008 11:51

I wonder if that is 'fair'
I can not see why the old accountant should pay your client's tax bill!. If the client had overpaid tax, would the old accountant have received the refund? Where's the logic?

I would have thought the claim might be limited to the old accountant's fees (in part), penalties and interest. I don't know why the old accountant should pay your fees as well, if he does not have the opportunity to put matters right himself.

Surely, the old accountant would prefer to offer a refund. There is probably an excess on his PII which makes a claim uneconomic, unless your client has suffered a loss from the receipt of poor advice

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