ICAEW student, Dilema with client & boss

ICAEW student, Dilema with client & boss

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Hi I apologise in advance for the length of this but got a bit of a dilemma and don't know how to deal with it. Heres the background. I'm a second year student studying ICAEW and I work for a very small firm, my boss (acca) who’s in his late 70’s and very old school and two AAT qualified staff (including me). I have recently started to produce accounts for a client (limited company) who runs a pub and  restaurant. There is one director and shareholder. The director personally owns the building that the pub and restaurant uses and rents out the upper floor to another business. The business turns over approx £180,000 net of VAT.

Here are the problems:

  1. During the company's last financial year the client banked just over £60,000 extra than the gross sales they had declared on their VAT returns or in their cash book, when the client was asked about this, he said it was loans from family and friends, these were all banked in small cash sums but they don’t know exact dates.

  2. They also spent about £35,000 in cash expenses  when they did not withdraw any cash from the bank and according to their records, they banked every penny they turned over.

  3. Also out of the business bank account the director transferred to their personal bank account £52,000 to cover the mortgage on the building and with the other rent received the total is just over £70,000 but the mortgage interest is only around £8000 a year based on the mortgage statement.

  4. And one last thing, they have been claiming VAT back at 20% on all their expenses, including insurance and other items that are zero rated and they have not declared a large lump sum they received as income from the brewery .

I believe the following needs to be done in relation to all the above:

  1. A SAR should be submitted to the NCA and then the money should be entered into the accounts as a loan with a related party transaction note.

  2. The client has/can not give an explanation of the £35,000 cash spent, so i’m not sure how this should be dealt with.

  3. I believe the £52,000 should be treated as rental income on the directors/shareholders self assessment (which we prepare), along with the other rental income.

  4. With the VAT the client should inform the revenue of the discrepancies and pay the correct amount of VAT owed.

The problem I have is that my boss won’t submit a SAR report, he has told me just to ignore it and put the money in as a credit on the directors loan account. With the £35k cash he says put the expenses through and put the payment as a credit on the directors loan account. The client is refusing to acknowledge the £52,000 is rental income and says that he will not be paying any tax on it. When I spoke to my boss he said with tax laws etc you need to read between the lines, which I don’t agree with. The client is also refusing to amend his VAT returns.

What I want to know is how other accountants would deal with the above situation? I

I am very close to leaving my current job as I don’t feel like things are being run the way they should be and I don’t want to jeopardize my career when I have a young family to think about.

Thanks

Rhys

Replies (34)

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By RTYD
10th Dec 2013 10:11

Your boss is wrong. Get another job.

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By andy.partridge
10th Dec 2013 10:44

Out of interest

Who prepared the previous year's accounts and director's tax return?

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David Winch
By David Winch
10th Dec 2013 10:49

Two issues

I am not sure that I agree with you on EVERY item (particularly the issue of whether the £52,000 is rental income of the director or simply a debit to Director's Current Account - which has its own potential tax implications) but there are two issues which remain:  (i) what do you do about apparent mis-reporting in the company accounts and various tax & VAT returns; and (ii) what do you do about your relationship with your boss.

I would make a (private & not over-heard) phone call to the ICAEW helpline for members in practice 01908 248 250 (who may in turn direct you to a local support member).

As far as a Suspicious Activity Report is concerned the 'text book' answer is to make a report to your firm's Money Laundering Reporting Officer.  The problem is then his and no longer a worry for you (whatever he does, or doesn't do, with your report).  The snag of course is that your firm's MLRO is likely to be your boss (who is a major part of your concern).

I think you should also be looking for a new job.

David

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By paras007
10th Dec 2013 11:01

This is what you should do

In my humble opinion, you will find it very very difficult to explain to potential employers (without harming your employment prospects) why you did not finish your ICAEW training contract.

As an employee, all you are required to do is report the Money Laundering suspicion to the Money Laundering Reporting Officer (if one even exists officially) and I would do this by emailing your boss of your suspicions and print/file the email away securely.

In the meantime, by all means look for another job if you want and when you come to give your reasons for wanting another job, I would suggest you explain it by way of quality/variety of work you are involved with rather than boss not following the book.

Your best bet probably is to finish your ICAEW training contract and then move asap. In the meantime, if it is hurting your conscience, you could always give HMRC a tip-off anonymously, but do not be surprised if nothing comes out of it.

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Replying to CherryBlossom:
David Winch
By David Winch
10th Dec 2013 12:56

Anonymous tip off to HMRC (not)

paras007 wrote:

 In the meantime, if it is hurting your conscience, you could always give HMRC a tip-off anonymously, but do not be surprised if nothing comes out of it.

I would strongly advise against making an anonymous tip-off to HMRC.  That would be a clear breach of client confidentiality.  If the ICAEW got to hear of it you could be in very hot water.

If this is really bugging you a better option would be to submit a SAR to the NCA yourself direct.  I am not keen on that - but it is a better option than a tip-off to HMRC.

David

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By ccassociates
10th Dec 2013 11:03

MLRO

Who is the MLRO?

Make your report in writing in the prescribed format to the MRLO and get an acknowledgement, at least this will cover you in the event of it hitting the fan. Refuse to make the entries into the accounts as he suggests, let him do it himself, then remind him that he could face a custodial sentence if it hits the fan.

I know its a tough call but you cant continue if this is the regime you are working under. Do you not have a duty to report him to ICAEW, who is the ML supervisor?

Unfortunately my experience tells me that even if an SAR is submitted nothing will come of it

 

 

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By Vplus2008
10th Dec 2013 11:04

Thanks for all your replies,

@Ardeninian

I believe there are no claw backs in my training agreement luckily. I will make a few phone calls to some agents over the next week or so. Thank you. 

 

@andy.partridge

A member of staff who left the firm last year had always produced this clients accounts and looking at their working papers they have ignored all the issues and not done anything with it. I have tried to work out how they have balanced the accounts but it looks like they have just inserted figures. 

@davidwinch

It did cross my mind whether it would be debited to the directors loan account. I will phone the ICAEW helpline today while on my lunch break. Thanks 

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By Vplus2008
10th Dec 2013 11:10

@paras007, @ccassociates

Officially my boss is the MLRO but that's only on paper, I will put my concerns in writing to him, so I have at least covered myself.

@paras007,

It does worry me that I would struggle to find another firm who would be willing to take me on part way through a training contract. 

 

Thank you for your replies 

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By dialm4accounts
10th Dec 2013 11:19

I moved part way through

I changed employers part way through my training contract, and for what was potentially not nearly such a good reason - being employed by a large blue chip, an hour's drive away, wasn't working for me and so I moved to a smaller local firm, where, incidentally, I stayed for 7 years.

There's nothing more soul-destroying than working somewhere where you're not happy, training contract or no training contract, and when your employer asks you to go against basic ethical principles that all accountants should adhere to, IMHO it's time to put your lifejacket on and jump ship.

Good luck.

M

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David Winch
By David Winch
10th Dec 2013 11:24

Sundry points

Re the £60k 'loans' from friends etc

Looking at the monies received & the records generally (i) are these loans ever repaid?  (ii) is it not more likely that these monies are unrecorded takings of the business?  (iii) is there a significant risk that these are receipts of some other activity altogether (such as drug trafficking or actual money laundering)?

If they are unrecorded takings of the business then see the treatment in the next point.

 

Re the £35k cash expenditures

Does it make sense that the director would have £35k available to meet these expenditures?  Do you have evidence to support that?  If so, the boss is right, credit the £35k to director's current account.

Otherwise I would suggest the accounting entries are Dr Expenditures Cr Cash account.  That probably will leave you with an 'impossible' cash account (with a negative closing balance).  I would eliminate that negative closing balance by Dr Cash account (with the amount required to leave a credible closing balance) Cr Sales & output VAT (based on 20/120 VAT fraction).

Then the client ought to be advised (in writing) to account for the additional output VAT.  (I appreciate the boss may prevent this happening in practice - but that is what ought to be done IMHO.)

 

Re income from the brewery

Do just check this is income, not a loan.  See the documentation from the brewery.  Tax & VAT implications will then be obvious (hopefully).

David

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David Winch
By David Winch
10th Dec 2013 11:36

Suspicious Activity Report

I would suggest the focus of any Suspicious Activity Report would be on tax evasion (corporation tax & VAT) by under-declaration of takings and / or some other criminal activity generating bank deposits.

The issue is NOT any suggested failure to comply with Companies Act requirements regarding disclosure in accounts. (That, in itself, would not be a reportable issue as no 'benefit' is derived from it.)

David

P.S. In terms of looking for a job I would suggest you stress your wish to be in a more modern practice offering wider experience, blah, blah.  I wouldn't say 'I had ethical disagreements with my boss' (makes you sound like a self-important pain in the neck!).

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Replying to jamiea4f:
Red Leader
By Red Leader
10th Dec 2013 11:43

don't undersell yourself

You are more marketable now than a year ago when you had only just started your training contract.

You sound fairly sharp and switched on, this should come across well at interview.

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By carnmores
10th Dec 2013 13:40

welcome to the new moral guardians of our age

how i hate these situations 

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Small Dog's RAT Return
By Oldmanwetmix
10th Dec 2013 13:45

Live with yourself

Sounds like you know what to do.

What your boss does re the client isn't ultimately your responsibility as he's responsible for signing everything off and you're not even qualified yet.

Keep copies of anything you have been asked to do that you weren't happy about. You probably will never need them, but just in case. Make sure no-one else EVER gets sight of them unless the authorities try to hold you responsible for anything (very unlikey in my experience).

Look for another job and be glad that you never crossed that line and can look yourself in the mirror.

Throughout your career people will ask you to turn a blind eye or falsify things. Its easy to become dodgy, but never cross to the dark side. Honest clients are nicer to work for, won't hold it against you if you make an honest mistake, and often become real friends too.

 

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Replying to JasonRodwell:
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By observer
11th Dec 2013 15:25

Agreed

I pondered the problem and came up with a similar response to you, namely that the poster is a semi-senior part qualified accountant, it his not his responsibility to consider what action should be taken as a result of his findings, it is for the qualified 'senior' to make these judgments. He may not agree with the 'senior's' response in which case he should include them in the review points when he presents the file for 'sign-off' and take a copy for his own files, together with copies of the journals the 'senior' instructs him to make. He has further discharged his responsibilities in that he has brought his concerns to the attention of the firm's MRLO. Accordingly he should make a contemporaneous note of the conversation with the firm's MRLO and keep that together with the other copy documentation.

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Replying to Tax Dragon:
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By observer
11th Dec 2013 16:22

This was meant to be a reply..

to oldmanwetmix's post

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By ireallyshouldknowthisbut
10th Dec 2013 14:52

.

Given the info in this thread I would delete or heavily edit your original post. 

your boss might read Aweb...

 

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By dbowleracca
10th Dec 2013 22:46

If you resign, it's possibly constructive dismissal
I'm not an employment lawyer, but surely if you want to file a report and get this right and the boss and client are saying they disagree, then when you resign is it not constructive dismissal as this now makes your position untenable?

Get some advice from an employment lawyer (not one of these on the web, a good local firm but keep it confidential!)

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paddle steamer
By DJKL
11th Dec 2013 01:03

Devils Advocate Points to consider

You mention the £52,000 passed to the Director's account and also the £35,000 of cash expenditure you cannot account for via cash withdrawn from the business account.

Have you had access to the Director's personal account?

Could he have withdrawn substantial cash out of his own account and used it to meet the business cash expenditure?

Whilst I strongly suspect your original analysis is likely to be correct, unless you have had sight of his personal account statements you cannot be certain the above has not occurred.

Re the possible missing sales, you make no comment on margins. If there is £95,000 of missing sales (The £60,000 unexplained lodgements and the £35,000 cash expenses) unless purchases have also been omitted then with a declared turnover of £180,000 net of vat the GP percentages should look very funny. Do they?

I suspect your conclusions are correct, however you do want to really be sure that you have examined all available evidence.

 

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By tonyh
11th Dec 2013 07:53

another devils advocate

In the current climate this type of business may well have cash problems and it is possible that the issue is more record keeping than fraud.You say your boss is old school well most of us old school accountants have a reputation for being too pedantic.

In my opinion the first step is to examine director's personal accounts.Many directors use their personal accounts as a sort of number 2 account.I have a pub ltd company client with cash flow problems. He pays personal  money into business bank to cover direct debits and then takes it out again when they have a good week not ideal but the only way to keep business going at present.

Also agree do not turn a blind eye and record all your concerns to your boss keeping copies.

 

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Replying to Tax Dragon:
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By andy.partridge
11th Dec 2013 12:52

Maybe

tonyh wrote:

You say your boss is old school well most of us old school accountants have a reputation for being too pedantic.

 


I have seen old school auditors issue journals to be input for 1p (still do), yet I see other old school, golf club chummy types who let clients get away with (financial) 'murder'. I can recall one where £ tens of thousands debit balances were moved from the directors current accounts to cost of sales. Anything so that the cosy relationship was not disrupted. That to me is old school, where there is a disconnect between what you are taught to do and what you do.
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By asillahi
11th Dec 2013 12:22

Leave! If you stay you stand the risk of being corrupted by your boss's way of thinking and that is the last thing you want while you are training.

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By shi shi
11th Dec 2013 12:36

Is it  common situation in

Is it  common situation in your firm or just very occasionally ? The point I am trying to make is if you have majority clients like this and your boss with your colleagues also are fully aware the problem and ignore them totally , then I say it is the time for you to move 

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By hiu612
11th Dec 2013 12:38

Old School

I read old school as being short hand for i) drinks a lot, or ii) dodgy. In this case, the latter. But maybe that's just because i am an Alan Partridge fan.

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By hiu612
11th Dec 2013 12:38

Old School

I read old school as being short hand for i) drinks a lot, or ii) dodgy. In this case, the latter. But maybe that's just because i am an Alan Partridge fan.

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By bigmuggsy
11th Dec 2013 14:05

I don't know why you're worried - its not your business so any come backs will be with your boss not you.  You realise his way is wrong, and lets be honest, being in his late 70's he probably doesn't care.  Take on board the experience on how NOT to run a practice and then stay or leave - simple as that.

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By carnmores
11th Dec 2013 14:13

fair comments all round

however i do not like having to grass up people who have nicked a paperclip etc or overclaimed £10 on their vat return cos they havent got a receipt. any sane society would bring in a law witha deminimis level but no not the UK goldplater of EU directives , its not the EUs fault its the people who draft UK laws er is that the civil service

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By TOC
11th Dec 2013 14:25

Leave

Resign  & tell boss if he tries to take money off you HMRC will receive an anonymous phone call.

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By TOC
11th Dec 2013 15:57

dilemma

I think independent legal advice is required. You don't want to have your future prospects damaged by the clown you work for. These people always have some excuse and when the proverbial hits the fan I'm in no doubt he will try to blame you.

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By Brend201
21st Dec 2013 13:54

Other advice - some slightly off-topic

Your dilemma and your concerns mark you out as the type of member that the Institute should be glad to have.  Be careful if you end up making allegations - it's easy to get a fact wrong and then leave yourself exposed.  I agree that you should seek guidance from the ICAEW - they should not leave you exposed.  

Don't be afraid to consider leaving; remaining in a toxic environment would be bad for your health.  Remember too that, ultimately, it is not your problem.  

May I suggest something else that may be of benefit to you?

1. Remove your name from your post.

2. Use sentences.  Your original post had too many commas and too few full stops. 

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By B Roberts
11th Dec 2013 17:53

In your position ....

i.e. second year "student" with a young family, as you have already raised the issue just make a note of it and file it away.  Then spend the next 18 months ensuring that you pass your exams.  Then look for another job (giving "positive" reasons only for looking - different experience, new challenge or whatever).

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By carnmores
12th Dec 2013 14:34

what wonderfull upstanding citizens we all are
Pass the sick bag alice

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Replying to lionofludesch:
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By observer
13th Dec 2013 13:17

The real issue here...

Is that the poster's boss is still in practice, that is assuming all the poster's judgments are correct.

 

Professional bodies should be removing incompetent practitioners from practice, or implementing compulsory peer review for those practices whose files/work are sub-standard.

 

It certainly isn't for part qualified semi-seniors to start taking on their bosses or reporting clients to HMRC.

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