Help with a problem regarding a potential client please.
We have a potential new client, Mr X, who has asked us to act for him.
He has a limited company, X Ltd, which was incorporated in 2006.
He has asked us to prepare and deal with his financial affairs for the year ended 31 March 2011 and the SA Tax Return for the year ended 5 April 2011.
He informed us that the previous accountants have dealt with all his affairs and that he has had little or no instructions from them as to the procedures which have been carried out in his, and the company’s name, but was presented with accounts and tax returns for signature having given them his records.
In response to the usual “etiquette” letter, the previous accountants have advised that they have used a dual structure of limited company with sole trader running alongside.
The 31 March 2010 year end company accounts have been prepared and filed with Companies House and the Revenue by the previous accountants. Self-employed accounts and Self-assessment Tax Return for 2009/2010 had also been prepared and submitted for him personally.
There is no separate bank account in the name of the company and apparently there has never been one. All receipts and payments have been dealt with through the bank account in Mr X’s name, plus many personal items of expenditure.
For 2010, all sales invoices were issued in the name of the client as an individual, however, they appear to have been used as the basis for the company turnover.
There is a figure in the accounts for Direct costs which exactly matches the self employed income in the SA Tax return and self-employed accounts although Mr X states that he never issued invoices from himself to the company.
There is also a small “Director’s salary” figure in the company expenses and there was apparently a PAYE scheme in operation up until March 2008 when it was closed by the previous accountants. The director’s salary has been included in the SA tax Return along with dividends as stated in the company accounts and self-employed profits, net of various costs, including, apparently, all accountancy costs for personal and company affairs, as there is no accountancy charge in the company accounts.
The dividends appear to have been calculated to leave a minimum Reserves balance in the company at 31 March 2010, although this is not based on any factual evidence.
The balance sheet includes a figure for Cash at bank, which is apparently an amount covering the bank balances and any undertakings that the client had made to pay corporation tax and other company liabilities from amounts held personally. There was no bank reconciliation as this would have been impossible to do with an account that was used partially for non business expenses. And as there is no bank account in the company name one can only guess at the actual make up of this figure!
All of the above appears to have been a continuing situation for a number of years prior to 2010.
It appears that for 2010/2011 the sales invoices have all been issued on company headed invoices, although as far as I can tell the rest of the circumstances remain the same.
My question for this august body is “What the heck do I do now?”
The ICAEW Ethics department have been helpful in their advice that I need to “do what is right” and if necessary amend anything that has gone before. However this situation has existed a number of years (since 2006/2007) and as such must surely be considered as a “fait accomplit” and as “accepted practice” and as such shouldn’t we just rectify the situation going forward? Or does this leave us open to a Money Laundering problem?
Has anyone else been faced with a similar situation? Is this a case where politely declining to accept instructions may be a solution, albeit not for the potential client?
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