Client has received an advance payment on a Sale several months ago. Customer whom is based in Africa then cancelled the order and requested the monies to be returned. The Amount in question is £125,000 and there is no evidence any goods were despatched. Client is saying there is a dispute over the cancellation charge and the intention is to pay the money back albeit instalments. It also seems they have already spent a lot of this money as well and do not have the funds to pay it back
When drawing up the statutory accounts, I entered the full amount as both the director and accountant (who do not get along) said the amount was in dispute and should not be considered as a "Sale" My mistake was not seeing evidence e.g emails.
A couple weeks ago I receive an email from an ex employee who was fired from the company and seem bent on revenge (long story) saying the client stole the money from the customer and would report this to HMRC
I am concerned on two fronts:
I did not get the evidence for the amount in dispute - client is saying there is no emails which I do not believe. Though the accountant who has left the company and have a good relationship (Whom I saw last week) said there are emails and director has a poor memory so probably can't remember and the amount is definitely in dispute but the director conveniently is burying his head in the sand.
Secondly HMRC may investigate and then expect the company to take the cancellation charge (whatever that maybe) as income in the accounts
Replies (33)
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Wouldn't be losing sleep over it
Assuming you did not formally audit the accounts you have acted in accordance with the director's instructions and could be realistically argued to be the prudent accounting treatment anyway if the amount is still under dispute.
The cancellation charge will presumably appear in the next periods financial statements and I can't see HMRC getting hugely excited about it in the mean time.
The only exposure I can see here for yourself is if you think the client actually has stolen the money which would be a AML issue to tie yourself in knots over.
You say on the one hand that there is a dispute and on the other that the client intends to repay the money.
So which is it?
And if there is a dispute, what is the nature of it?
Do you mean there is a dispute over whether the £125,000 should be repaid, or over something else?
If there's nothing in the T&C
If there's nothing in the T&C's or contract regarding cancellation charges, and no other documentation to substantiate a claim for cancellation, your client has no grounds to apply the fee.
£125,000 should be repaid to the customer. This just sounds like a delaying tactic from your client.
So in that case you keep the entire £125k in creditors, and simply await the resolution of the dispute. What could be simpler?
Like I said the decision about how to account for what has occurred so far could not be simpler.
Money Laundering
this whole thing smells like a ML exercise to me, with money coming from Africa and going back again having been cleaned up in a UK account in the meantime.
Fair enough
it just looks so much like one of the scenarios in one of the many many online AML courses i have done over the years :)
If it's money-laundering ...
... they're not being particularly clever. I agree that there are certain similarities to various examples but it would usually be the case that the customer would accept a cancellation charge - (a) ensuring that they get the cash back promptly and (b) adding a degree of legitimacy to the transaction. I've heard it said that money-launderers are among the few people that are happy to pay tax and other charges :¬)
Hmmm....
If your client thinks a cancellation charge applies, why doesn't he return the balance of the money, and keep the cancellation charge? This would show he has honest intentions (which would help if it ever goes to court), and reduce the risk of a legal claim (because the amount at stake is smaller)?
[Answer: because he has spent it?]
What is the connection between this scenario and the previous one?
Your last paragraph suggests there is, but what it is is not clear.
What do you need to protect yourself from?
You were not a party to the transaction in question and it is not within your power or responsibility to settle any of the disputes between the company and it's customer and it's ex-employee.
All you have done is prepared the accounts on what seems to me to be a prudent basis on the instruction of the director. The ex-employee can report you to the police, MI5 or the A-Team and as much good it will do him.
Perhaps David Winch will provide you with a better answer for any AML reporting obligations you may have, but for what its worth, I can't see any evidence of a crime being committed - it is certainly looks odd to hold onto the money if no goods where ever dispatched but if there is a genuine dispute over costs incurred then this would feasibly drag on for an extended period.
Confidentiality
1. Client confidentiality prevents you from discussing sensitive commercial issues with a disgruntled ex-employee.
2. If the ex-employee's actions amount to harassment you can take appropriate legal advice.
3. If you are satisfied, on a professional level, with the client's explanations there is no more to be done. The real question is, are you?
4, If you are not then you might explore matters until you are.
5, If the matter is not explained and resolved to your satisfaction then you must consider AML issues.
I am wondering what grounds the client has to regard this as a 'dispute'. Is this dispute contrived merely to deny a just repayment?
So perhaps ask youself...
"If he had the money in the bank account and put it aside then I wouldn't have an issue but he hasn't got the money and has spend most of it."
So does this mean that if you show the full amount as a creditor (as recommended by JGR above), then the company is balance sheet insolvent?
If they have spent it on (for instance) plant & machinery within the company that can''t be liquidated easily, then are they able to 'meet their obligations as they fall due'?
In either case, it's clear what the next step should be...
Sometimes it seems most of AA could be replaced be a short flowchart that says:
Q. Have you got any money?
If YES: Consult an accountant
If NO: Consult an IP
its his company and his problem
ask the director what his best estimate of the cancellation charge is ( he might be claiming he is due damages for cancellation ) , show that as income and the rest as creditor , include it in a letter of representation (i still use them even for unaudted accounts) .. and its not your problem so i am not sure why you are getting entangled in this dispute
if he's spent the money , unless there was a condition whereby it was to be held in client a/c or trust a/c , its just too bad ..and if the company is insolvent , just alert the directors to their responsibilities
and while you are at it tell the ex employee not to ring you anymore
There may be some legitimate reason to withhold some money...
... if your client had expended some time and effort and indeed money in commencing the sourcing/ manufacture / procurement of the product or service they provide before their customer "cancelled".
That being said i would expect that refunding the non disputed portion would show goodwill and a positive attitude to dealing correctly with the dispute.
Yes the customer thinks whole of £125K shold be repaid while client thinks a cancellation charge applies. There is nothing in the terms and conditions on the cancellation charge.
Surely no one sent £125K to your client without some reasonable level of paperwork and contract conditionality. I suspect there is some somewhere, though it's not really your problem. Accounting for the facts as given by the director is your responsibility.
MLR (not)
It seems that you believe there was a genuine customer order & payment then a genuine cancellation.
It may prove to have been unwise of the company to have spent the money & it may be that you have to consider whether the company is a going concern.
Do you believe that if the order had not been cancelled the company could have completed the order & continued trading (so there was no dishonesty in the company taking the order & this is not a case of fraudulent trading)?
If so it seems there is no dishonesty there.
Also if there is a genuine dispute re cancellation there seems to be no dishonesty there - even if the supplier is dragging his feet over the refund.
If there is no dishonesty I suggest there is nothing to report under MLR.
David
@Taxwizard
Having looked at your previous questions, you don't half have a lot of very difficult clients!
Can a customer cancel a contract?
When a willing buyer and a willing seller enter into a binding contract, is there any general right in law for the buyer to cancel the contract unilaterally at any time before the actual supply of the contracted goods or services? (There was apparently no provision in this contract for such cancellation)
Doesn't this oblige the seller to provide the contracted goods and services and entitle him to keep all the money UNLESS he and the buyer subsequently negotiate and agree to set aside the original contract? A new contract might release the seller from the obligation to supply and might require him to refund a substantial part of the payment he received under the original contract.
Interesting point above
If there is no provision in the contract for cancellation then the client might have a claim to the money, but equally there is surely an obligation to supply the goods.
its not your job to talk about client "ethics"
you are making value judgements about client ethics.. thats not your job...you are not a solicitor or a county court judge .. you need to stop it.... you are making things difficult for yourself.. and you will probably end up enmeshed in all sorts of client disputes.. do your job , (the thing you are being paid for ), comply with any responsibilities you have - MLR rules, professional regulations , etc , then formally record any client representations to cover yourself .. then just bill the client and hopefully get paid...
maybe it is theft, and a conspiracy...
I realise this may seem paranoid but...
Have you considered that the "ex employee" presumably of the paying company may have sent the money across "by mistake" to the UK company on the basis that the UK company would "cut him a deal" and pay him a commission (or cancellation fee) for his trouble. The overseas guy has been caught, sacked and now wants his side the bargain. Hence the agitation...
Just a thought :)
I have had dealings in the past with African companies and at one time someone abused their trust and was found asleep in a packing case at an airport, but don't let that worry you :) :)