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PRIVATE COMPANY SHARE-HOLDER ACCOUNTS

PRIVATE COMPANY SHARE-HOLDER ACCOUNTS

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I was recently passed a set of accounts from a private LTD company in which my sister (and others) has invested, to interpret the figures, as the company is seeking further investment. I am an accountant in practice, though I am not advising my sister on her finances or investment matters.

The accounts comprise:

- cover sheet;

- company information;

- directors report (signed by a named director, dated, and containing the statement '… prepared...with...part 15...');

- statement of Directors Responsibilities;

- detailed profit and loss account;

- detailed balance sheet;

- fixed asset schedule.

There are no other notes or pages (though the balance sheet is detailed), no accounting policies, no share capital note etc.

The profit and loss and balance sheet are of a type produced for sole-traders or for management purposes.

The balance sheet is not signed, dated, no named director approving the accounts and has no statements of any type.

I expect the company falls under the small audit exempt company regime.

I am aware of the Companies Act and FRSSE requirements. As these accounts are not in a format I am familiar with for small LTD companies, I enquired with the accountants, if these were abbreviated or full accounts. I was told these were the full accounts, and they were passed by the accountants to the company/directors for circulating.

Having further enquired of the directors, I am advised that the directors have no accounting or regulatory knowledge, and rely entirely on the accountants to meet the company's statutory compliance needs. The accountants do the book-keeping, vat etc. and have produced these accounts, and have charged the company for final accounts plus filing online of full and abbreviated accounts with HMRC and Companies House.

Both HMRC and CoHs have received accounts, filed by the accountants using the respective online templates, so both have received the appropriate accounts.

I expect a director has signed a set of accounts. The directors report of the accounts forwarded has been signed, though I don't know if this is the only page signed. These accounts have also been made available to others, including potential lenders and investors. As far as I know, no one has queried or commented on the form of the accounts.

Companies Act refers to reporting requirements and form of accounts, FRSSE (...may be applied..) does the same. Both state that the Balance Sheet must be signed by a named person on behalf of the Board. FRSSE states that if the Accounts or Balance Sheet do not comply with the requirements of the Companies Act or is not signed, then every director of the company commits an offence and is liable to a fine.

My query:

  1. If no one concerned that has received the accounts (directors, shareholders, potential lenders, investors, etc), has commented or expressed any concern about the form of the accounts, should the directors, or the accountants be concerned with or bother to go to the time and expense of preparing accounts that meet a certain format, bearing in mind that the relevant authorities have received compliant accounts.

  2. Are there any consequences, implications or actions arising from the accounts circulated for:

    a) the shareholders;

    b) the company;

    c) the directors;

    d) the accountants.

  3. Who monitors if an offence has occurred, and who fines?

  4. Has any one come across a similar situation.

Any comments, any thoughts on the matter?

PS. Additional information to the points raised:

I had asked the accountants for a copy of the abbreviated accounts, and the same copy of accounts were forwarded.  I downloaded a copy of the abbreviated accounts from CoHs, which have been accepted by CoHs as compliant.  I expect the correct boxes were ticked.  The abbreviated balance sheet made up date is the same as the 'full' accounts provided, and the figures match.  It appears the accounts provided are the only ones drawn up, and that the figures have been extracted from these to complete the HMRC and CoHs templates.

Replies (17)

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Teignmouth
By Paul Scholes
22nd Mar 2015 00:10

First things first

You are right, the accounts provided may actually contain all the right numbers but they are not the statutory accounts that should have been provided to all shareholders, containing a signed/dated balance sheet, a short P&L and notes containing accounting policies etc.

The balance sheet and directors report would normally make reference to the accounts having been prepared under the Companies Act Small Company provisions and FRSSE.

Very small "Micro Entities" are entitled to prepare reduced disclosure accounts but even these have a short P&L and a signed Balance sheet, which would make reference to Micro Entity provisions.

So it sounds as though your sister has been given some form of management or pre-statutory accounts which, with a detailed Balance sheet & P&L, would provide more than she was entitled to as a shareholder but they are not the statutory accounts and she is entitled to see these and should then make sure that they tally with this detailed version.

As an after thought, this might be a silly question, but are you sure the period covered by these accounts matches a period already submitted to the authorities?  If unsure you can check at Companies House.

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By Stuart.thomson
22nd Mar 2015 01:25

I agree with both you and Paul Scholes. The accounts do not appear correct although it does not surprise me that companies house software accepts it.

You need to get this corrected for 3 reasons -(1) confidence in the figures being presented; (2) on an exit you want to minimise warranty exposure for your sister; and (3) any fund raising exercise may be doomed.

However in getting this sorted your sister does not want to be seen as a trouble maker. Small companies are sadly able to manipulate situations in a way larger companies cannot which could affect the share value to the detriment specifically on your sister.

I would ask your sister to request the accountancy work be tendered with the existing accountants to be included on the tender panel (it could be dressed up as a regular review of overheads) but with cost not being the sole determining factor. The directors will present the stats to the bidders who will spot the issues. When enough people respond negatively on the accounts , the directors will accept the issue and they should understand the ramifications too.

Alternatively write to Companies House and inform them of your concerns. They may agree with you and send out one of those letters!

Specifically on your second question (I think the above answers your questions 1&3):
A) no direct impact on shareholders although as Paul Scholes has indicated it may be that they have not received the stat accounts. This may affect notice periods eg in a shareholders agreement. I think that is a technical legal question though.
B) risk of fines and my point earlier. In theory the company could be struck off for not submitting accounts.
C) its a fiduciary duty so the directors could be fined and in theory barred from being directors (unlikely). I think suing the directors for any consequential losses or negligence is far fetched but I suppose its an option to be considered in the right circumstances.
D) the accountants are liable in my view as they have not met the terms of their engagement, did owe a duty of care and have been negligent and known better. The question is what are they liable for. The losses are likely to be consequential in nature and so it depends on the engagement letter. Their institute may be concerned and investigate but everyone makes mistakes so unless its a pattern I cannot much of an impact from that route.

I think this sloppiness or lack of professional expertise should be punishable more harshly as it tarnishes the whole profession. However I cannot see that with so many governing institutes each with their own unique selling points but offering the same solution -accountancy regulation. It's just another issue which pushes the value of accountants down.

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By johngroganjga
22nd Mar 2015 08:01

Or to keep it simpler your sister could just say to the company that the accounts are non-compliant and that as a result this must mean that the accountants are not up to the job (as they appear honestly to believe that they are compliant). As this will reflect badly on the company, particularly at a time when new investors are being attracted, the accountants should be sacked and competent new accountants be appointed without delay. The first task of the new accountants will be to produce a compliant version of the last accounts.

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Out of my mind
By runningmate
22nd Mar 2015 10:17

Non-compliant accounts

I am sure hundreds of sets of non-compliant accounts are filed with Companies House & HMRC every day.

As far as fines / penalties etc are concerned nobody cares.

RM

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Replying to runningmate:
RLI
By lionofludesch
22nd Mar 2015 10:28

Well .....

runningmate wrote:

I am sure hundreds of sets of non-compliant accounts are filed with Companies House & HMRC every day.

As far as fines / penalties etc are concerned nobody cares.

RM

Well, so long as they're filed on time.

Less facetiously, do we know whether the company filed compliant abbreviated accounts ?

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By klm4taxacc
22nd Mar 2015 20:07

Further information

Thank you for your comments, very useful and informative.

I have added some additional information above, to some of the points raised.

Also I don't think the accountants are affiliated, certainly no reference to any bodies on their website, though promoted as a 20 year old firm, maybe with new staff or owners!

I have also got the previous period's accounts, which are in the same format.  I had seen these before, but didn't give much thought to the format as was only looking at the numbers at the time, as it was a start-up company.

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Out of my mind
By runningmate
23rd Mar 2015 08:27

You are suggesting that the accountants are incompetent & that they are unqualified.

I am suggesting that there is nothing particularly unusual about accounts being filed which do not fully comply with statutory requirements - and that nobody in authority cares about that (so long as some accounts are filed on time).

RM

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By johngroganjga
23rd Mar 2015 10:31

Your sister's remedy is against the directors of the company who have approved non-compliant accounts and thus may have denied her and other shareholders some of the information that they are entitled to receive by law.

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By klm4taxacc
23rd Mar 2015 23:49

Very frustrating...

Thank you again for the comments and suggestions. I have advised the directors (on behalf of my sister) that the accounts are not in the required format, and they should seek advise on the matter, and have referred them to the regulations.

 

I was advised by the directors, who have no knowledge of the regulations or requirements, that they rely on the accountants, who do the book-keeping, the vat, prepare the accounts and submit the returns. All these things are done and upto date, and the directors are happy with the service. Also, as far as I am aware, none of the other shareholders (100+) have queried or commented on the format. The director's, unless they take advise, don't know any better. No body else seems to care! Is anyone at fault, if no body is bothered?

 

I too was not bothered initially with the presentation, as Paul Scholes identified, the accounts received contained more information than would have appeared in the statutory format, and I was only interested in the numbers, and the accounts balanced.

 

I don't want my sister to appear to be a nuisance, nor cause the company to incur additional costs. Equally, I wouldn't want my sister's investment put at risk, from any consequences arising from the company's lack of compliance. The other concern now is that these accounts reflect on the quality of work undertaken by a firm of accountants, therefore should we be concerned about other compliance matters, ie. book-keeping, vat records etc.  Unfortunately she does not have the % shareholding to request an audit.

 

We are having difficulty is deciding what course of action to follow.

 

The new Micro Entity provisions show much less information and presume the accounts present a 'true and fair view'. The accounts received do show more information, so do we just accept the accounts and ignore the regulations (particularly as the balance sheet does not state which provisions apply), as everyone else involved has done.

 

Do I now start presenting my LTD company clients with a copy of the management accounts at year -end and forget the formats, simplify the process, less burden on everyone, less 'red-tape' to deal with! Very frustrating... 

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By johngroganjga
24th Mar 2015 07:27

Related party transactions
You say there is more information in the accounts than the minumum required, but what about related party transactions?If I were an outside investor in a private company that is the note that I would read with the most attention.

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By Stuart.thomson
24th Mar 2015 09:24

I think there are a few courses of possible action. johngroganjga us right. Your principle concern is RPTs.

Can your sister persuade another shareholder to back her motion for an audit?
Requesting a tender as I suggested earlier is a non-aggressive way of raising the issues
Your sister has access to the books and so give you authority to do a quick check (it probably only needs a TB, fixed asset ledger and creditors ledger review)
Ask for budget/forecast information on a regular basis or any board reports so you can see progress more frequently.
If there are any professional investors or HNWI then they are likely to to push this issue to a resolution.
Get your sister to ask to meet the accountants and you accompany her. Presented correctly it can be seen as simple understanding rather than confrontational.

It is quite hard to advise you given we don't know enough about the company. If for example it was just a single property SPC then you can work out what the profit should be.

Anyway let us all know how it goes as this is the sort of thing where we can add value to our clients.

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Replying to GW:
paddle steamer
By DJKL
24th Mar 2015 09:47

Only a shareholder

Stuart.thomson wrote:
I think there are a few courses of possible action. johngroganjga us right. Your principle concern is RPTs. Can your sister persuade another shareholder to back her motion for an audit? Requesting a tender as I suggested earlier is a non-aggressive way of raising the issues Your sister has access to the books and so give you authority to do a quick check (it probably only needs a TB, fixed asset ledger and creditors ledger review) Ask for budget/forecast information on a regular basis or any board reports so you can see progress more frequently. If there are any professional investors or HNWI then they are likely to to push this issue to a resolution. Get your sister to ask to meet the accountants and you accompany her. Presented correctly it can be seen as simple understanding rather than confrontational. It is quite hard to advise you given we don't know enough about the company. If for example it was just a single property SPC then you can work out what the profit should be. Anyway let us all know how it goes as this is the sort of thing where we can add value to our clients.

The sister is only a shareholder, not a director, so has no access to the books. Her entitlement is to the statutory accounts and to attend the AGM. Whilst she is not receiving a correct version of the statutory accounts she is currently receiving a more detailed profit and loss account than she is entitled to see, so earlier comment re cutting off this information is pertinent and the pros and cons re forcing the issue re correct accounts needs carefully weighed. (Full accounts with all notes but no detailed P & L versus hybrid accounts without full notes but with detailed P & L)  

Accordingly it seems to me her scope of action is  somewhat limited.

 

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By Stuart.thomson
25th Mar 2015 08:22

However I presume there is a shareholders agreement and they normally provide access to information. So I assume she has a right to info. She needs to review the shareholders agreement or charm them. I agree the statutory rights are limited and that it why I have not advocated a confrontational approach.

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Replying to kathyk0410:
paddle steamer
By DJKL
25th Mar 2015 09:27

I would beg to differ

Stuart.thomson wrote:
However I presume there is a shareholders agreement and they normally provide access to information. So I assume she has a right to info. She needs to review the shareholders agreement or charm them. I agree the statutory rights are limited and that it why I have not advocated a confrontational approach.

Am not sure with a company with over 100 shareholders (as indicated by the OP) I would presume there is a shareholder agreement, certainly the OP does not  indicate one exists and I suspect, given the information we are given, it would have been mentioned if it did exist,

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By klm4taxacc
26th Mar 2015 00:15

Related party tansactions and Shareholders Agreement

Thanks again.  Learning as we go on.

Very good point re RPT's.  Balance Sheet shows loans outstanding to Directors, and other loans (secured - charge registered at CoHs).  Also don't know if any RPT's through PnL or BS.

No ShA. Bulk of shareholders have invested through a crowdfunding platform.  Sister and some others have A shares (voting, as invested above a certain limit) others have B shares (non voting).  Unfortunately, the combined 'A' investor shareholding is insignificant. It is becoming clear that without a ShA (giving certain rights), or HNW investor(s) with a ShA in place looking after their and hopefully other shareholders interest, there is very little that can be done.  As pointed out, scope of action somewhat limited.

We are reliant upon the management to perform their fiduciary duty and the professionals who provide them with the compliance services to exercise their duty of care.

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By Tim Vane
26th Mar 2015 01:13

If the accounts are incomplete and the accountants belong to a professional body, your sister should inform the accountants that she will report them to that body unless compliant accounts are forthcoming. She should also notify the board that she is doing this, and give them the opportunity to do it themselves or get the accounts rectified.

If (as may well be the case) the accountant is unqualified and/or not a member of a professional body, your sister should inform the board of this fact, and ask that they table a motion at the next AGM to have the accountants replaced with a qualified firm. At the very least this will make the shareholders and directors aware that the accountants may not be up to scratch. Many people are not aware that accountants are not regulated and it often comes as a surprise to them; they may well revise their appreciation of your concerns once the accountants are exposed in this way.

And before anybody comes back at me on the "qualified" versus "unqualified" debate, I myself am unqualified so have no axe to grind, but if the accountant in this case is truly incompetent then this may be a good lever to prise them away from the board.

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By Stuart.thomson
26th Mar 2015 14:53

DJLK, yes I didn't pick up the 100+ shareholders. This makes it very difficult without a shareholders agreement.
I would ask for information and then push harder if necessary but ultimately it is an investment with no influence. You could try and pull together a band of brothers (ie shareholders) to try and wield some power but it is likely to be futile.

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