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False Accounts

False Accounts

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I have been approached by a potential client who is a one man band company. The issue is their previous accountant tailored the accounts and tax computations for the last two financial years based on how much tax he wanted the client to pay. How do I proceed with this?

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By cheekychappy
28th Jan 2016 11:39

How much tax does the client want to pay this time around?

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By thomas34
28th Jan 2016 11:54

Turn Down The Job

Or if you insist on taking it on get a director's guarantee for your fees. Then you'll need to look at "materiality" as far as the errors are concerned and whether the current year can amend the numbers suitably. If the errors are material, you'll need to decide whether to amend the earlier year(s) and if the client doesn't agree whether it warrants a Money Laundering Report.

It doesn't look good, does it?

 

Thanks (4)
By Duggimon
28th Jan 2016 12:07

I wouldn't dismiss out of hand

Perhaps the director has decided to change accountants to come clean? First thing to do is assess how much the shortfall is, I would suggest doing it as quickly as possible too because when the client is confronted with it they may not want to carry on as your client and you would find it difficult recovering fees.

Assess the shortfall in tax, in rough terms, explain to the client and explain you can't proceed as their accountant unless the issue is addressed. Then depending on where discussions go from there you can assess your responsibilities under the ML regs.

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By johngroganjga
28th Jan 2016 12:08

What to do
Ascertain the true opening balance sheet;Consider to what extent the differences are taxable (probably all of them);Put through a PYA in the next accounts to correct the opening balance sheet (net of tax on the uplift);Adjust the next CT computation to bring the gross PYA into the taxable profit;Advise client to pay the tax on the due date.

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By Andp
28th Jan 2016 12:11

Quote then get ALL fees upfront, photocopy driving licence AND passport and council tax and electric bill ( TWICE ). Agree with above MLR

Then prepare your accounts. and as above perform the materiality test. Until you know how "out" the previous years are - you could be over worrying the job.

Probe client or do your own research if previous agent is/was affiliated to an institute and conclude if previous agent still has liability insurance.

Could get messy but not enough reason to turn work away .

Met a new client Nov 15 -   SA 13/14 still unsubmitted by previous agent. Over £1500 of penalties racked up.

Client asks old agent for insurance/ qualifications info.- conclusion he has neither. Quick look on companies house concluded old agent had overdue accounts himself and was facing strike off. 

A few heated phonecalls between client and old agent - conclusion old agent pays HMRC the £1500 penalties!!

 

 

Thanks (2)
David Winch
By David Winch
28th Jan 2016 13:42

Money laundering reporting issue
Previous posters have not clarified whether you should be reporting a suspicion of money laundering by your new client or by his previous accountant or both.
That needs careful thought depending on what your new client tells you, what suspicions you form & whether PoCA privilege applies.
David

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By Andy Reeves
03rd Feb 2016 11:35

Surely, if the client comes clean and accepts the PYAs, then he is in the clear, but the old accountant would have to be reported no matter what?

 

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By Yesican
28th Jan 2016 15:01

Material

Thank you very much everyone.

The tax difference is roughly £10k. Client is very uncomfortable with the situation and wants to come clean. Apparently when client told the accountant that he was unhappy with the figures and was leaving, the accountant said he could reduce the tax bill even further. Accountant asked him, so how much tax do you want to pay

Thanks (2)
Hallerud at Easter
By DJKL
28th Jan 2016 15:57

So £50,000 give or take

Yesican wrote:

Thank you very much everyone.

The tax difference is roughly £10k. Client is very uncomfortable with the situation and wants to come clean. Apparently when client told the accountant that he was unhappy with the figures and was leaving, the accountant said he could reduce the tax bill even further. Accountant asked him, so how much tax do you want to pay

So, maybe a £50,000 difference in the accounts, sounds material re all my clients re profit  and loss and all but one re balance sheet considerations.

Thanks (1)
David Winch
By David Winch
28th Jan 2016 15:10

ML reporting
Sounds likely that PoCA privilege will apply so you will not report your new client. However I expect you will be reporting a suspicion of money laundering by the previous accountant on the basis that he is obtaining fees by deliberately & dishonestly falsifying accounts & tax returns for clients.
David

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By Gone Sailing
28th Jan 2016 15:15

Is a PYA a solution to evasion? £10k ? Hmm.  £1k maybe.

Write a letter - from you to HMRC - with the known indisputable facts - show potential client - get them to approve it - send it.

Now do the accounts and deal with the fall out.

Thanks (2)
By johngroganjga
28th Jan 2016 16:39

PYA

Gone Sailing wrote:

Is a PYA a solution to evasion? £10k ? Hmm.  £1k maybe.

Write a letter - from you to HMRC - with the known indisputable facts - show potential client - get them to approve it - send it.

Now do the accounts and deal with the fall out.

Yes a PYA (obviously if properly dealt with on the CT computations) solves the tax problem for the client.

Thanks (1)
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By Energise Accounting
28th Jan 2016 16:45

False Accounts

personally I would not touch it

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By The Innkeeper
03rd Feb 2016 11:24

wouldnt

use my bargepole any where near this one

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@enanen
By enanen
03rd Feb 2016 11:39

Or is the client telling you the truth?

Why would a client sign accounts they dispute?

This sounds like a croc.I would take everything said to you with a pinch of salt where there is no evidence of any kind. What evidence to court standard is there? You must also be prepared to ask the client that if this goes to criminal or civil proceedings how does he feel about the process and are there other things he has done in the past that may come to light?

If this is just one persons word against another without any firm evidence then he needs to understand the consequences. Has this chap woken up one day thinking I now want to be honest in my accounts? Unless you have evidence, other than hearsay I would be very cautious.

 

 

 

 

 

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By carnmores
03rd Feb 2016 11:46

whats happened to the world

a client appears to have been badly advised and now wants to correct matters and lots of people on here say they wouldnt touch with a bargepole etc etc, what a sad state of affairs 

Thanks (9)
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By The Innkeeper
03rd Feb 2016 11:49

@carnmores

I think that you are right . The name of the game in this day and age is to protect your own back. Based on the information given this is potentially a very risky case. Hence my earlier post based on the data given

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By birdman
03rd Feb 2016 12:11

Why...

would doing the right thing put an incoming accountant at risk? I'd jump at the chance to help a new client sort out the past; I'd be realistic with him regarding fees and the possibility of an enquiry, mention fee protection cover and get on with it!

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By Gone Sailing
04th Feb 2016 14:02

Fee Protection

birdman wrote:

would doing the right thing put an incoming accountant at risk? I'd jump at the chance to help a new client sort out the past; I'd be realistic with him regarding fees and the possibility of an enquiry, mention fee protection cover and get on with it!

Agreed, but disclose to HMRC at the earliest opportunity.

But, I've just had fee protection declined for a 2013/14 late submission.

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By Tosie
03rd Feb 2016 12:34

Long time in the business one lesson learnt.:

Never believe what a client tells you about old accountant.

Could it be a situation that the client queried the tax bill and the accountant said something like.

"for goodness sake how much tax do you think you should be paying".

If potential client said it happened one year and then he moved out it would stack up but for a couple of years I would doubt the clients story. 

Why would an accountant want to commit fraud without any pressure from client.

Thanks (3)
Hallerud at Easter
By DJKL
03rd Feb 2016 12:47

Money (That's what I want)

Tosie wrote:

 

Why would an accountant want to commit fraud without any pressure from client.

Being more cynical, why would an accountant want to commit fraud without his share of the spoils; given his/her training it surely boils down to a risk evaluated rate of return question!! (Well maybe a little kernel of the ethics course is also still active somewhere in the furthest reaches of the memory)

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By peterlashmar
03rd Feb 2016 12:53

Tax fraud

You have only 1 option, ONLY ONE;

Tell HMRC everything

Otherwise you are then complicit too.

 

Last year we took on a client who was getting no advice and felt that he was paying too much tax ( common enough). His previous accountant had not deducted mortgage inters in a  & B business. When we started looking at the previous year's accounts they did not stack up with the next year at ll. On discussion with the client he said that the previous accountant reduced the turnover to be below the VAT limit - by 20k. Client had not received any final accounts nor a copy of Tax Return from previous account. This came to light when we received a copy of the Tax Return from HMRC. Needless to say the previous accountant has not replied to any of our letters and do not answer telephone. The are not particularly near to us but I called into their office one day and it was locked with no lights on.

I had a meeting with client who was shocked but readily agreed to us making a full declaration to MRC and also made a substantial payment to us in advance of fees. HMRC have been quite helpful and have indicated that they will not charge penalties although it is not finalised yet. Client has paid all back tax that we have computed including VAT.

You MUST make a full declaration. You know of tax EVASION (i.e fraud) and YOU must declare it. Even if he doesn't agree or become a client.

Fines etc for an agent are higher than the taxpayer!

 

 

Thanks (2)
David Winch
By David Winch
03rd Feb 2016 13:19

Disclosure to HMRC??

peterlashmar wrote:

You have only 1 option, ONLY ONE;

Tell HMRC everything

Otherwise you are then complicit too.  

. . .

You MUST make a full declaration. You know of tax EVASION (i.e fraud) and YOU must declare it. Even if he doesn't agree or become a client.

Fines etc for an agent are higher than the taxpayer!

I am sorry but I cannot agree that the new accountant can or should pass information about the taxpayer's financial / tax affairs to HMRC "even if he doesn't agree or become a client".  Clearly that information is provided to the new accountant in confidence & that confidence must be respected - which means that the new accountant can only pass that information to HMRC if & when the taxpayer agrees to that disclosure.

There MIGHT be a need to make a Suspicious Activity Report to the NCA under s330 PoCA 2002 / MLR 2007 in respect of the taxpayer (but there might not be, because of 'PoCA privilege').  There is quite likely IMHO a need to make a report to the NCA regarding the previous accountant, but that's it.

David

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By ShayaG
03rd Feb 2016 15:11

Fraud committed by accountants

Not a lawyer but I do not think that it is obvious that the fees charged by an accountant for his services are reportable "proceeds of crime." The alleged crime seems to me to be incidental to the fees, which would be for the services set out in the engagement letter. Ask your professional body for advice.

I do not see any basis in your story so far for reasonable suspicion that the client has been complicit, and I would think it sensible to avoid asking questions which may lead you to suspect otherwise. I think just knuckle down, correct the situation in the current year, pay the tax which is due (including both the previous year and any other previous years),

Of course if you do have a reasonable suspicion you must report to the NCA.

I'm not aware of any obligation to inform HMRC, and I see little upside to your client in doing so.

You may have a professional responsibility to report the other accountant to your regulator, insofar as this does not prejudice your client's position.

What assets on the opening balance sheet have been misstated? Stock / WIP?

 

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David Winch
By David Winch
04th Feb 2016 08:18

Inform HMRC about what?

ShayaG wrote:

I'm not aware of any obligation to inform HMRC, and I see little upside to your client in doing so.

I may be wrong, but I took ShayaG here to be referring to the possibility of the new accountant informing HMRC of his suspicions that the client's previous accountant was dishonest.

I did not read this as a suggestion from ShayaG that tax irregularities in relation to the client's previous tax returns could simply be left unaddressed.  Of course the tax arising in previous years which has not been declared has to be addressed.

David

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David Winch
By David Winch
03rd Feb 2016 15:22

@ShayaG

You need to look at s340 PoCA 2002.

As you will see the definition is widely drawn!

"in whole or part and whether directly or indirectly"

David

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By michaelblake
03rd Feb 2016 19:29

@ShayaG

"I'm not aware of any obligation to inform HMRC, and I see little upside to your client in doing so".

 

There is a clear obligation stated in the Taxes Acts for all taxpayers to declare the full mount of their profits and gains from all sources on an annual basis. Where this has not been done the position has to be corrected as soon as is practical when the error comes to light (or is admitted). 

If the returns that have been made to HMRC to date have understated the true profits made by the company and as a result tax has been underpaid the taxpayer company has a duty to report that understatement to HMRC. The accounting concept of materiality is not relevant in deciding this matter .

Where it is known that profits have been understated any new accountant considering accepting an appointment to act for the company can only act on the basis of full disclosure and with the client's agreement to instruct either him or  a specialist adviser to quantify the understatements and disclose them to HMRC immediately. If the potential client will not agree to proceed on that basis the new accountant cannot accept the appointment. 

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By bigmuggsy
03rd Feb 2016 21:56

Who was the accountant?!

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By johngroganjga
04th Feb 2016 08:02

Yes of course the tax has to be put right, and no accountant can act for this client on any basis other than that of full disclosure.

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By rbusfield
04th Feb 2016 10:29

voluntary disclosure

We have had a lot of ex Lunn clients who were being investigated by HMRC as they suspected that the accountant/adviser had been reducing the client's tax bills using inflated expenses and technical arrangements which Lunn said were not liked but accepted by HMRC. I assume the reason was that they would attract more clients.

From an HMRC perspective it would be much better in the long term for the taxpayer to come forward voluntarily instead, of any errors being discovered by HMRC. It will result in more favourable treatment eg in relation to penalties and a shorter investigation. You will feel in control of the disclosure. HMRC will want to look at all years and will want to understand the reason behind the error - was the taxpayer aware at the time etc.

It can be better to use a specialist tax investigation firm to do this so that you can focus on your day to day activities and maintain an independent adviser going forward. This should help your relationship with the new client going forward - investigations/disclosures can be sensitive and stressful.

Rebecca Busfield

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By johngroganjga
04th Feb 2016 10:35

Investigation?
There is no investigation to deal with here. There may be one in future of course when the next accounts with the PYA go in, but not necessarily in my experience.

Yes of course the taxpayer here is going to correct the errors voluntarily. That is what he is leaving his old accountant and coming to the OP for.

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By rbusfield
04th Feb 2016 11:27

investigation

Fortunately there is no formal HMRC investigation in place here yet. In order to make a self assessment voluntary disclosure to HMRC we find it is normally necessary for the taxpayer/adviser to undertake their own investigation of the facts/transactions etc in order to prevent HMRC starting their own enquiries / checks or finding any other errors. 

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By johngroganjga
04th Feb 2016 11:35

Yes of course the new accountant will have to carry out a full investigation in order to restate the opening balance sheet correctly.

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By rbusfield
04th Feb 2016 11:48

disclosure

In case this point hasn't been made already, if the taxpayer was aware of the errors and signed the tax return anyway then the disclosure has to be made carefully because HMRC would classify that as a deliberate error by the taxpayer.

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By ShayaG
04th Feb 2016 16:33

The tax will be driven by the accounting profit

Hence fraud no in CT600 or disclosure of accounting profit to HMRC, but in the calculation of that accounting profit.

Under old UK GAAP unless fundamentally wrong (rather than just materially so) no need to restate the accounts - even if they have been deliberately misstated to avoid tax.

In summary

Previous year accounts incorrect but not funadmentally so, so no need to restate.

Previous year CT600 therefore is not incorrect.

Hence no restating CT600.

I suspect that the situation is different with an individual rather than company.

Happy to be corrected if anyone knows otherwise.

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David Winch
By David Winch
04th Feb 2016 17:53

@ShayaG

So you are suggesting that a correction put through as an item in the current year's P&L A/c (& hence the current year's CT return) to add in previously undisclosed profits would be sufficient to deal with the problem without drawing to the attention of HMRC that the previous years' accounting profits were understated?

There would remain however the issue of the need to submit a Suspicious Activity Report to the NCA re the dishonest previous accountant.

David

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By ShayaG
05th Feb 2016 10:29

Davidw

Yup, agreed.

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By Yesican
05th Feb 2016 12:01

£300 fee

Thank you everyone for the responses and debate. The client has been paying £300 per year for the company accounts which explains the mess they are in. I am still waiting for professional clearance to confirm exactly what is going on. 

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By Andp
05th Feb 2016 12:35

HMRC and big brother in general may well already have their "eye" on the old agent by virtue of other disgruntled clients and their new agents making full disclosures to HMRC. ???

If this does turn out to be the case - the entire client base of the old agent could be lambs to the slaughter.

I have just heard yesterday- a rumour that a local agent is being convicted of serious fraud. I do not have any facts yet and no doubt they will come to light after sentencing 

 

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RLI
By lionofludesch
05th Feb 2016 12:45

Interesting debate.

My thoughts are that the client seems to want to come clean and pay what he owes. There's no need to turn this work away.  There's no suggestion of dishonesty on the client's part - just naivety.  He doesn't need an SAR (his previous accountant might, obviously).

I would have thought that putting the facts to HMRC would be the approach to take.  Should be possible to come to an arrangement and, with a bit of luck, the cowboy accountant will be closed down.

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