John Newth looks at the perennial problem of cash differences in company accounts.

On preparing the accounts for the first year of a new limited company, RH discovered a large cash difference of about £100k (click here [1] for details). This had been queried with the director, who had informed RH that the company had made payments in cash for labour for the queried amount.

RH intended to inform the director that the company needed to make a voluntary disclosure of the situation to HMRC and negotiate a settlement, after RH had done whatever he could to obtain P46s and make other enquiries. Members’ views on this scenario were requested, as well as confirmation that a report to SOCA need only be made if the company is not prepared to make a voluntary disclosure to HMRC.

Chris Wharton considered that RH might be overreacting in this case by making a SOCA threat. The same would apply to a money laundering report. The problem in simply that £100k is missing from the cash accounting and an explanation is needed. If the directors are unable to give an adequate explanation, then the large amount of expenditure should be debited to the directors’ loan accounts as funds that they are responsible for. ‘Victor Meldrew’ suggested that RH should ‘run away quickly’.

Another suggestion came from Fellowcraft, who suggested that RH should prepare the accounts, allocate the £100k to wages, obtain a management letter to that effect and bill the company. This should be followed up with a letter to the directors informing them that they needed to make a declaration to HMRC, and that RH would be willing to help with the negotiations. The clients should be given a little time to mull RH’s suggestions over. If they don’t do things properly then RH should inform them that he had no choice but to disengage himself. The SOCA and/or MLR report should then be made.

This query highlights the perennial problem of the cash difference. Section 12B, Taxes Management Act 1970 and the equivalent corporation tax legislation stress the requirement that proper books of account should be kept, with the threat of a tax penalty if this does not take place. However, human nature being what it is, the cash difference at the year end still occurs, and one wonders how other practitioners deal with this, both for companies, partnerships and sole traders.

When I was completing my accountancy training, agreement of the cash account for the year was a major part of the accounts preparation exercise. If there was a significant difference then this had to be reported to the partner involved. If there was a lack of expenditure then the difference was likely to be debited to drawings. If there was a lack of income, then the difference would probably be credited to business takings. HMRC would probably not be informed.

We now live in a different world, with substantial HMRC compliance, regulation and investigation powers, as well as the SOCA and MLRO threats already referred to. In the case of the company referred to in this query I prefer Fellowcraft’s approach. First of all I think that as much work as possible should be done to identify the wages alleged to have been paid, with the names and addressees of the recipients. Failing complete satisfaction regarding this, then the sequence of events outlined by Fellowcraft would seem to be inevitable.

Accountants do not want to necessarily ‘run away’ when difficult situations occur in auditing and accounts, but there is undoubtedly a limit to the generosity and help that they can provide to clients.