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Why we should ban abbreviated accounts for small companies. By Richard Murphy

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23rd Oct 2008
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We all now know that the credit crunch is real. But what does it mean to the small accountant, and what can be done to make life easier for our clients? In particular I have asked myself the question of whether any regulations could change that might ensure the survival of some companies that might otherwise fail.

It would be tempting to say that a whole range of taxation legislation will be changed to assist this process. I have to be candid though, I think that the chance of this happening is very remote when it is clear that the government is going to be desperate for every penny they can get to help pay for the bailed out banks.

In that case I looked to other regulation, and in particular that in which accountants have an interest and I have a suggestion to offer. I think the time has come to ban the filing of abbreviated accounts at Companies House.

My reasoning is straightforward. The basis of the credit crunch has been the failure of banks to lend to each other because they are unsure of the risk hidden inside each other's balance sheets. They have probably been right to have that concern, but the same problem can now be found amongst the small business community, many of whom trade with each other. What will bring down more small companies during the coming depression or recession will not be normal trading losses or even a lack of work. The biggest threat to most clients of most small firms of accountants will be unanticipated bad debts big enough to change them from solvency to insolvency by crippling their cash flows at a time when extended overdraft and other loan facilities will not be available.

If that is the case then these companies need the best quality information they can secure about the people to whom they supply credit. Abbreviated accounts are not good enough for this purpose. All accountants know that a multitude of sins can be hidden when no profit and loss account need be published and when no analysis of critical balance sheet data, such as current liabilities, need be put on public record. In that case, how is anyone to know if there is a massive bank overdraft that is likely to be at its limit, for example? This is precisely the sort of non-disclosure that abbreviated accounts allow.

If bad debt is the biggest risk that small business might face then it is clear that the government has a duty to protect small businesses from that risk. That can be done by requiring the filing of full accounts by all limited companies and by all limited liability partnerships for the next two years, on record and on time, with penalties being properly imposed if they are delivered late, and not when they finally turn up. In that way the small business community will get access to the information to allow them to continue to trade in the same way that the government is trying to do for the banking sector.

Is it much to ask in the circumstances?

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By jasonholden
30th Oct 2008 11:10

I know ..
Martin, my posting was prompted by Richards call to ban abbreviated accounts and his reasons.

I like everyone else here am well aware of the reasons for public filing and have not mentioned anywhere that this should change.

Jason

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By martinfoley07
29th Oct 2008 23:29

good 'eavens ...
...Jason. Company shareholders have limited liability. That is the raison d'etre of public filing.

Otherwise, why bother at all for non-listed companies?
Listed exchanges can impose their own filing rules, they do not need company law to enforce market filing.

Nothing to do with pathetic rants elsewhere about small businesses. Small businesses have far bigger and more important worries and issues, in both good times and in bad times.
One of them of course, may well be to decide on the best structure for their business, from micro upwards.
Sole traders and partnerships do not have limited liability - hence they (rightly of course) can keep all their details away from prying public eyes. And save on accountants fees!

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By jasonholden
27th Oct 2008 19:12

You are kidding
Ah Richard, any chance to create a reaction :-)

From a small business view point this idea is of course ridiculous, out of date figures which show more detail will not give anymore indication of whether small businesses should trade with each other, things can go from good to bad very quickly.

Most file abbreviated figures so they can keep the true size of their business from prying eyes, I would not want my next door neighbour knowing how much I make or don't make, so a set of abbreviated accounts suit me fine.

And if this is to give small businesses more detail to make informed trading decisions then what about those who are self employed or in partnership and file no figures on public record?

Stefan Töpfer I see on his blog has also got something to say on this:
http://www.sme-blog.com/4/are-accountants-small-businesses-friends-or-foos

Not one of your better idea's Richard :-)

Jason

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By dialm4accounts
27th Oct 2008 16:11

Do even full accounts give that level of detail?
A good indication that a company's in difficulties would be if it can't pay its creditors.

An abbreviated balance sheet doesn't tell you who the creditors are and how long the payment's been due.

But neither does a full set of small company accounts (schedule 8 I think) give you that information.

I couldn't tell you whether a schedule 4 set does because it's ages since I saw one of those.

Historic accounts really are of limited use if you want to decide whether to trade with a company.

If the company pays you on time, that's a good start.

M

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By Joan Yeadon
27th Oct 2008 12:53

Jason
As well as indicating that there may be an acute credit risk problem with a client, the items on my list enable firms to make informed credit decisions based on client payment behaviour, the excuses they make for non-payment, conversations, client visits, credit reference agency “watch-out” alerts, etc.

If you did a credit status check on a potential client and you saw a list of CCJs - either satisfied or unsatisfied - you would take care about how much credit you let them have? For example, you may ask for money up-front or personal guarantees from directors and shareholders.

If you had a long-standing client who started exhibiting some of the symptoms on my list, you would monitor the situation closely and not let them run up bills they could not pay?

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By petestar1969
27th Oct 2008 10:25

Abbreviated accounts were allowed...
.... so that accountants could produce more paper and charge more fees..

Ok slightly tonuge-in-cheek, but pretty accurate.

The point someone made about competitors getting information on companies is valid, but if every company has to file the full set everyone would eventually be on a level playing field.

I for one would like to see abbreviated accounts banned because I'm tired of having to explain to clients why we produce two sets of figures, one for Companies House and one for HMRC..

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By martinfoley07
26th Oct 2008 18:43

I never saw much justification .......
.........for allowing the filing of abbreviated accounts in the first place.

The Companies Bill envisaged the abolition of abbreviated accounts for ages - then they suddenly got stuck back in again near the end of the long process of finalising the bill.
I never really ascertained who lobbied for this to be retained / put back in, but presumably it was various worthy bodies.

p.s to answer Al 's query ; Have you ever wondered why abbreviated accounts were allowed in the UK in the first place? - yep, I sure have!!

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By User deleted
26th Oct 2008 16:39

Decision-making. Yes but whose?

"abbreviated accounts mean nothing wherease a full set, even if out of date, would provide a much better basis for decision making." Quite!

But a full set of accounts even out date would also give the company's competitors a 'competitive edge or advantage'. Why would any company want to give its competitors that? It's like turkeys voting for Christmas not to be abolished! How many would vote "yes"? None.

I have to say, I am a big fan of abbreviated accounts and I wouldn't want them to be abolished however useless they may be! Clearly they do not provide a good basis for decision making but for whose decision making?

If a formal request is made to a company for a full set of accounts, most companies would supply it provided the reason behind the request is, in the opinion of the directors, unlikely to be detrimental to the company's competitiveness. For instance, a request from a competitor is unlikely to be granted unless it is deemed by the directors to be for the benefit of the company.

The point is, no business person should be relying on filed unaudited accounts (full or abbreviated) alone for decision making. Bring back auditing for all companies except non-trading or dormant ones. If the government can afford to bail out big banks, surely paying the audit fee on behalf of small companies should be chicken feed.

Have you ever wondered why abbreviated accounts were allowed in the UK in the first place?

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By Jason Dormer
25th Oct 2008 18:19

Joan
Original post is not regarding our clients going bust and leaving us with unpaid bills, it is in relation to small firms having access to information that will enable them to make better informed credit decisions.

I couldn't agree more with this - abbreviated accounts mean nothing wherease a full set, even if out of date, would provide a much better basis for decision making.

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By birdman
24th Oct 2008 14:47

No additional cost
All companies have to produce full statutory accounts, so there will be no additional cost to them.

As to whether the extra information will be of any use in risk assessment - possibly, but they'll need to know what to look at/for, and the info will be rather historic.

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By Joan Yeadon
24th Oct 2008 16:12

Signs of Impending Failure
I agree that filing full accounts would not be much help in risk assessment because the information will be typically over a year out of date.

If you know what to look for, you can spot the tell-tale signs of impending failure and manage the situation so that if a client goes bust, it does not put your own business in jeopardy.

The sorts of things to look out for are:

 Cheque signatory never there
 Management changes/loss of key members of staff
 “Re-organisations” in the accounts department delaying payments
 Changes of bankers
 Delayed payments
 Simple non-payment
 Round sum “on account” payments
 Post-dated cheques
 Bouncing cheques
 County/High Court Judgements – especially from HMRC in respect of unpaid VAT or NI
 Winding Up Petitions
 Late filing of statutory accounts, annual returns, proposals to strike off, etc.
 Serious accident/disaster
 Business dependant on one or two key people
 Falling profit margins
 Dusty stock
 Shabby/run down offices/workshops/plant and equipment/vehicles
 Old technology
 Legislative restrictions on business

Any one of the above symptoms in isolation may not be a problem. However, three or more of the above signs is worrying because it suggests that there may be a pattern emerging.

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By scott314259
24th Oct 2008 13:59

More jobs for the boys
The thought that all small businesses should incur the extra expense of producing full statutory accounts - and that this will give significantly useful information to others to judge whether they are a good credit risk (given that the data will typically be over a year out of date) - is a bit fanciful in my opinion.

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