Previous accountant

Previous accountant

Didn't find your answer?

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)

Please login or register to join the discussion.

Teignmouth
By Paul Scholes
17th Jul 2012 14:14

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.

Thanks (1)
avatar
By twj4789
17th Jul 2012 14:20

Thanks Paul, she wasn't a director at the time. I have experienced the ACCA complaint process before, we probably will complain and as a point will not charge the client for the time spent!

I discussed looking at further action against the exhusband but with a child involved I can understand the clients reluctance. I just can't believe the accountant ignored such high figures, in the high hundreds of thousands!

Anyway, thanks again!  

Thanks (0)
avatar
By bernard michael
17th Jul 2012 15:09

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

Thanks (0)
avatar
By twj4789
17th Jul 2012 15:53

Thanks Bernard

Unfortunately the shares were valued at £1.00 in the settlement and the rest of the assets split as normal. Interesting view though, not one I had considered!

Thanks (0)
By ireallyshouldknowthisbut
17th Jul 2012 16:08

.

Have you actually spoken to the former accountant?

Or is this the wife's view of things?

Thanks (0)
avatar
By twj4789
17th Jul 2012 16:21

Yes, we asked him if he had prepared any asset schedules, if he had any paperwork to verify the assets and finally if he had any idea what they were.

While waiting for his response the client's accounts dept. went through ther own records and provided us what they could about the asset values.

We eventually got a response back saying "I do not keep such records or documents and suggest to review your client's records". He continues to act for the exhusband and seems reluctant to enter into any discussions with us.

 

Thanks (0)
By G_T_I
17th Jul 2012 19:18

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.

 

 

Thanks (0)
avatar
By twj4789
17th Jul 2012 18:03

GTI

Hi GTI,

Thanks for your reply, I understand the accountant's loyalties to his client. The issue isn't with the valuation of the company at the divorce date. The issue is that there are considerable asset values in the accounts that are totally overstated (by 300%) or in one case the company has never owned and never will own the asset.

Technically the previous director kept the company solvent amoungst the bad intercompany debt with overvalued assets. My issue was more with the accountant for not requesting purchase invoices to prove the values stated in the accounts and whether this was negligent on his part to the other 50% shareholder (the wife who at this time was not a director).

Thanks (0)
avatar
By Tosie
17th Jul 2012 21:41

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.

Thanks (0)
avatar
By twj4789
18th Jul 2012 11:48

Thanks Tosie

You are right, although solicitors were involved it was completed "amiciably". The business was transferred at £1 shares as it was predominantly a consultancy business, the wife bought in almost all the income.

As the is the driving revenue earner the company is really only worth the balance sheet value due to the nature of the work there are no longterm contracts that would be transferrable.

The assets were never revalued until 2012. We are talking about a balance sheet value of £1m being written down to £250k. Throughout 2011 the company was unknowingly trading as insolvent, I have completed 2011 and 2012 accounts at the same time (late I know!) and the company does become solvent due to profits in 2012.

My main concern is not the divorce, transfer of business etc. but the wife was not a director in 2010 or prior when the assets were entered falsely (especially in the case of the asset that was never in the name of the company). The accountant entered these values on the word of the director (exhusband) without requesting any proof of existence. As the wife was a 50% shareholder did the accountant have a duty of care to her? If so did he fail this by not questioning such high asset values? If the answer to both is yes then potentially there could be a claim to make against the previous accountant.

Thanks (0)
avatar
By bernard michael
18th Jul 2012 12:08

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

 

Thanks (0)
avatar
By twj4789
18th Jul 2012 13:37

Thanks Bernard

You are probably right with the shadow director. She did actually believe one of the assets was owned by the company and has emails to prove she was told this was the case. As with the others she should have checked and questioned the accounts.

In 2011 the company was insolvent once the assets were revalued and the various intercompany debts written off. Due to profits in 2012 it is solvent again.

It would seem the best way forward is to ensure the accounts from 2011 ongoing are correct. Persuing a claim against the exhusband or accountant would seem longwinded and pointless.

Thanks for everyones advice!

Thanks (0)
avatar
By Tosie
18th Jul 2012 13:42

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.

 

Thanks (0)