We have just taken on a new client. She had recently divorced her husband and as part of the negociations he transferred his 50% shareholding in a Company X over to her (she now holds 100%). Previously he had managed the funds and accounts in Company X aswell as his over companies Y, Z and many more, most of which are insolvent. We have had to write a considerable amount of intercompany loans off as bad debt.
Investigating the accounts further, now the with the bad debt written off, the balance sheet shows material assets which keep the business solvent. On investigation 3/4 of the asset value is overstated and not owned by the company and the other 1/4 was never bought by the company, it was just paid for and should have gone into a Directors Loan Account. These assets were shown in Company X's last filed accounts and these were signed off by the husband.
Avioding conversations about trading whilst insolvent etc. The previous accountant did not ask for proof of ownership of the assets, he didn't even ask for an asset schedule showing what the assets are made up of. He had no schedule or even an idea about values that were 70% of Company X's balance sheet value. Has he been negligent to the wife as a 50% shareholder for completing accounts in which he didn't verify material figures?
It is a limited company, VAT reg but no audit required. I would really appreciate your opinion, I would like to advise the client to consider legal action for negligence however if this unlikely we may just complain to the firms professional body.
Thanks!
Replies (13)
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Avoid negligence at the moment
A claim for negligence is always a tough way to start the process of correction of a past error. In this case it was not an audit and so, unless his engagement letter and report indicate otherwise, he was under no obligation to verify anything. Also, assuming she was also a director at the time, her husband signed on behhalf of the board including her. Any claim for negligence or complaint for poor work would be made by the client, ie the company, and not her as a shareholder.
Having said that of course there's a duty of care and his reg body will have expected him to bring some attention to the numbers he was preparing and so, yes, if it were you or me, we'd have at least asked what the assets were and there may be grounds for a formal complaint (If it's the ACCA be prepared for a long haul, he says from bitter experience).
More importantly though are the amendments that presumably need making to the previous published accounts? This would be my route to getting the last accountant involved in that the client would ask him to correct them and re-submit to companies house & HMRC at no cost. You will be able to judge his opinion as to his own responsibility for the false accounts by his reaction.
When the divorce settlement was made the wife's solicitor would have attributed a value to the 50% share. If this now proves to be incorrect he may want to go to the husband and demand more for the wife . You should immediately involve the wife's solicitor at this stage with your findings
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Have you actually spoken to the former accountant?
Or is this the wife's view of things?
Keep out of it.
"He continues to act for the exhusband and seems reluctant to enter into any discussions with us."
You do appear to be putting him in a difficult position. Your loyalties obviously lay with your client (the ex wife), so surely you can appreciate that his similarly lay with his client (the ex husband).
From what you say it appears to have been an acrimonious divorce so I would ignore both sides, keep yourself as well removed from it as possible, and as someone else said, if there is now some doubt over valuations used in the divorce settlememt then throw it vack at the solicitor as it's his problem.
Not only accountant at fault
You don't give any details of asset values but the normal procedure on a divorce is for an independent valuer to value the business.There is the little matter of capital gains, how best to arrange the sale of shares,i.e did the company buy the shares.If the divorce had taken place before the transfer it is essential to get things right.Ofcourse the capital gains liability will fall on husband but the ex wife is involved and she needs an accurate valuation if she decides to sell/transfer the shares at a future date.
The £1 per share is not an acceptable valuation.
Reading through your post the thought occurs to me that this was a DIY divorce.
I realise that this is not your immediate concern but I cannot see how you can move forward without these issues being resolved.
One further point is were the assets re-valued at any point.
I would be interested to know how much we are talking about.
As a 50% shareholder she had access to the accounts and was probably deemed to be a shadow director. Therefore she would be hard put to prove any claim she might make that she knew nothing about the overstatement
If the accountant was sued he would probably rely on the fact that information suppled by the director was knowingly wrong. Also he would certainly enjoin the husband in the claim as a part 20 defendant
Lots of lovely fees for lawyers various.
Why do you think the company was trading whilst unknowingly insolvent when the balance sheet asset base was incorrect
You must not advise on any possible negligence claim but refer it to a solicitor and let his PI insurance take the burden
My View
Agree it is job for solicitors it is hard to see how a consultancy could have assets of a million. unless ofcourse R & D.
It amazes me that the wife could have "fallen" for it..
Still think the divorce lawyers were at fault.
Good Luck.