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When digital handovers go wrong: Who’s to blame?

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In the age of Making Tax Digital, what are the professional ethics of maintaining and sharing a client’s digital accounting records?

30th Nov 2021
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Is it the accountant’s obligation to keep hold of all previous clients’ digital records?

Digital record-keeping has been a part of the profession for years, but the transition to MTD is posing new questions on what exactly can and can’t be transferred.

A recent thread in our Any Answers forum was triggered by a member who was dissatisfied with how another accountant handled a client’s data during the handover period between their firms. When the new accountant requested a backup in their professional clearance letter, the ex-accountant replied: “I deleted the Sage records from our computer systems as it was using up one of our licences, and I needed to make way for other clients of our practice.”

The Any Answers jury was divided, with some members blaming MTD for the confusion. “Pre-MTD, I would be with the outgoing accountant on this although I would like to think I would be more generous in terms of audit trail/nominal activity handed over,” commented AccountingWEB member adam.arca. “What I wouldn’t be doing would be handing over the licence if I had absorbed that cost.

“Post MTD, this looks like it could be a problem on the assumption that MTD is going to require a complete audit trail and we as accountants will have been responsible for the final touches and submission.”

Who’s to blame?

Some leaned more towards the client holding responsibility, with accusations that some people can be “lazy” when it comes to looking after their own accounts.

However, others people on the thread felt that retention lay on the accountant’s shoulders in order to comply with certain rules and regulations:

“I always transfer the license to the client when he leaves so he (and his new accountant) have the digital record keeping. For desktop I give the data backup,” commented one member.

To get an authoritative answer, AccountingWEB contacted the ICAEW’s technical advisory service. The insitute official replied: “There is nothing that I am aware of that states handover of records must be in a particular format. If the accountant has been using accounting software and the accountant owns the licence to that software, then they are under no obligation to send electronic back-ups, unless contracted to do so in their engagement letter. They can choose the format they handover the information. If the software licence is the client’s then I would say they should handover the backup/login details to the account, so the new accountant can continue.

“In terms of the comment about deleting Sage records – the former accountant would need to be careful in terms of document retention rules, as well as handover requirements.”

This is not the first time the handling of digital records within the profession has come into question, and with MTD ITSA on the horizon there could be more sticky situations on the way for accountants.

Cloud accounting

AccountingWEB member kevinringer raised the point that cloud data has no alternative backup. With so many types of software flying around, there is more opportunity for differences to arise between firms when clients switch. 

“Some accountancy practices restrict their software to certain products only, for example Xero (which is increasingly likely as more software hits the market). If the outgoing accountant used, say, QuickBooks, who is going to handle the conversion of data? In the days of desktop products, the outgoing accountant could send a backup of the data to the new accountant and it was up to the new accountant to get it sorted,” said kevinringer.

With the added MTD requirements, if a business is required to retain VAT records for four years but goes under investigation 12 months after leaving their old accountant who dealt in paper, there’s nothing to prove the records were maintained digitally. 

“Does the client need to maintain those records in a digital format for four years?” asked kevinringer. “If so, how can this be done in practice when moving accountant, especially when moving from one software to another?”

Professional ethics

The digital records debate calls into question the professional responsibilites around record keeping, which might not be as straightforward as HMRC had hoped for the shift to MTD.

“Instead of all these proprietary file structures, HMRC should have insisted MTD uses one accounting database structure and all software is merely an interface to the data and functionality,” argued kevinringer.

“When the client moves accountants, they merely switch off database access for the old accountant and switch on access for the new. The two accountants don’t even need to use the same software because software is merely an interface that works on the same database.

“But this isn’t going to happen because HMRC can't see beyond the end of their nose.”

To find out more about getting to grips with digital records for MTD, catch up with this recent installment of AccountingWEB Live where we examined how to ensure clients are ready for the extension of Making Tax Digital for VAT.

Replies (2)

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By Carol Jefferis
02nd Dec 2021 09:59

Surely requirement to keep records doesn't necessarily mean that they need to be kept continuously on the same platform. Thinking back to Companies Act requirements I see no reason why accounting records can't be on (say) QuickBooks for a few years with accountant A then move to (say) FreeAgent with accountant B. The QuickBooks ledger can be exported to excel for record retention purposes and closing balances used for opening figures in FreeAgent. For the average small business without multiple sales and purchase ledger items to bring forward that is an easy solution and the old excel record is arguably 'digital'.
I appreciate that folks more tech savvy than I am will argue that having got to an excel export the whole ledger could be uploaded to the new software, that's fine but not essential in my view.
Surely what we should all be doing is impressing on the client that they carry the primary responsibility for accounting record keeping for their businesses.
I am 'old school' and believe that accounting records belong to the client and working papers belong to the accountant. Only in exceptional circumstances should the accountant refuse to hand over the accounting records to the client or their new accountant. Where accountants keep copies that is to satisfy their own professional and PI insurance requirements not because they have some ongoing duty to provide backup for departed clients.

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By JD
02nd Dec 2021 14:12

What makes it more complex is that many accountants will be moving towards using cloud package of choice to prepare the final accounts, tax returns etc, leaving no clear separation. Add to that some accountants will have developed processes & systems in using these packages that are part of their IP.

For that reason we have defined who owns what in our engagement letters which makes it clear. The clients ownership stops at the point of a copy of the completed VAT return, final accounts etc and all digital systems we choose to use to produce that work (including Xero/QBO) remains with us, including for the purposes of the companies act.

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