A big thank you to David Kirk, whose response to last week’s column, inspired this follow-up.
In a comment responding to my last column (aka Round one), he said “One particular area that definitely needs attention in auditing is that of tax liabilities. As far as I can see next to nothing is done in audits to establish that there are no additional PAYE or NIC liabilities, with results that are all too predictable. I am dealing with an employment status case at the moment where an arrangement has been left untouched that was set up 37 years ago, and the big firm that has done the audit has never looked at it since. As it involves one of the company's directors the amounts being claimed by HMRC are definitely material.”
For rather longer than I care to remember, employment tax and reward has been my special subject.
Repeatedly, my colleagues and I have tried to persuade our fellows in audit that this discipline is of vital importance. From our perspective, subject to any legal constraints, close interaction with the auditors along the corridor could be a fantastic marketing tool for our talents.
However, as David Kirk noted, there is a second string to this bow. If auditors do not pay enough attention to employment tax matters then a serious risk of accounting misstatement at a highly material level could result.
In my relatively limited experience, audit has increasingly become a commodity that accountants provide at minimum cost, in order to reduce their fees and bring recovery rates up to the barely acceptable heights of 25%-50%. In this light, anything that can be cut is, while things that should not be cut may slip into the abyss as price pressures increase.
Over the last couple of years, a significant part of my portfolio related to support services for those who had been persuaded (conned, some might say) into investments in tax-saving schemes that did not save any tax, once they had been challenged by HMRC.
The specific projects typically related to due diligence when a company was about to be sold with pregnant tax liabilities. In every case, it was necessary for the vendors either to settle the taxes, indemnify the purchaser or drop the sale – and I have seen all three.
This inevitably begs the obvious question as to why the company’s auditors did not identify what was in every case a significant level of financial exposure. While changes in HMRC policy might conceivably have altered perceptions, the risk must always have been there, despite the fact that not only would the potential amount be omitted from the liabilities side of the balance sheet but, even worse, there would not even have been a mention of uncertainty in the accompanying notes or the auditor’s report.
It is time for auditors to talk with their employment tax colleagues and ensure that this area is not ignored in future. Failure to do so could result in incorrect accounts, negligence claims and potentially either significantly higher insurance premiums or, perish the thought, insolvency.