CASE STUDY

LIV40 Mr M
Loss Of Earnings

Some 25 years ago a former client asked me whether I would prepare 2 different sets of accounts for his business. One, showing disappointing results, would be used for tax purposes; the accounts that showed higher profits would be sent to his bank. The set showing disappointing results was the only one that was prepared, because that set realistically showed the state of his business. It folded soon afterwards; my former client found his true niche and wrote a successful series of guides to hill walks. Recently I believe that I came across the kind of accountant that my former client had been looking for. As a forensic accountant I was instructed to prepare a report for a mortgage broker (“Mr M”) whose business had been interrupted by water damage to his office from the flat upstairs. He had undoubtedly suffered financial loss and my remit was to quantify this for his solicitors. I initially requested his accounting records and accounts. Mr M promptly faxed to me his annual accounts covering the last 5 years. All were signed by Mr M and his accountant, Mr Y, the most recent set having been signed only 6 months earlier. However, of the 51 figures for income and expenditure, 45 ended in a zero. This suggested to me that figures had been estimated, or rounded to the nearest £10, or both. Further, the accounts for one year did not add up, and all accounts lacked balance sheets. As Mr M had said that his accountant still had some of his accounting records, I asked the accountant, Mr Y for these for each of the five years, plus details of journal entries, copies of tax returns, and balance sheets for each of the five years. Mr Y replied that he only prepared income and expenditure statements for Mr M, that all the accounting records had been returned to Mr M, and that he did not complete Mr M’s tax returns. He failed to mention the journal entries. There was then a delay during which I was unable to make any progress; the client had not provided any accounting records and the accounts were unreliable. Then Mr M sent me 2 business cashbooks that, between them, recorded all his income and expenditure for the 5 years. On initial inspection this seemed promising; the monthly totals appeared to match those in the annual accounts, or differed by only insignificant amounts. However, I noticed that 8 of the dates in the page supposed to show expenditure in December 2003 had somehow become December 2007. Suspicions raised, I then noticed “© 2008” on the covers of the two cashbooks. Mr M told me that these were his original cashbooks, so I knew what kind of client I was dealing with. Next, Mr M sent me a sales invoice “duplicate book” covering 4 of the 5 years, and some bank statements for an account that was obviously not a dedicated business account. Mr M stated that he had no other bank account but, later on, produced bank statements for a second account. The entries in both accounts bore no resemblance to anything recorded in the cashbooks. I still did not know how Mr Y had been able to produce annual accounts for Mr M; the cashbooks that I had seen did not exist when the accounts were prepared and the bank statements were of no help whatsoever. At this point Mr M told me that the figures in the recently prepared cashbooks were accurate; he had transcribed the figures from his original cashbook which had been badly damaged by water leakage (in April 2006) and was now illegible. How Mr M had been able to read an illegible cashbook is another unsolved mystery. Becoming frustrated by ever-changing stories I produced a report that said that I was unable to quantify the loss. This prompted a letter from Mr Y which stated that the accounts “were prepared from bank statements, no cashbook, purchase and sales ledger exits” (sic), and, later, that “everything is in the bank statements”. Although no cashbook “exits”, Mr M then managed to produce his old, water-damaged cashbook. Although the water damage had occurred in 2006, some of the pages still felt damp. Far from being illegible, the writing was perfectly clear, although the ink lines in the paper had run. I expect the cashbook had been put in the bath two weeks previously, put on a radiator, and then written up from the new cashbooks that I had returned to Mr M. To emphasise its accuracy, Mr M had recorded one month’s figures twice, and some of the dates in December 2003 had again become December 2007. I copied the cashbook and sent the original to Mr M’s solicitors so that they could examine it. I have not mentioned expense invoices. I saw very few, and several had been handwritten by the same individual (or five individuals, none of whom who can spell “received”). None matched expenditure recorded in the cashbooks. Some were made out to Mr M and his landlord. Others are made out to another person altogether. As for the bank statements, these recorded 2 payments to the Financial Services Authority which were not recorded in the cashbooks. Payments to well known surveyors recorded in the cashbook did not appear in any bank statements. It is surprising that these surveyors would accept payment in cash and forget to charge VAT. A friend, who is also an accountant, had previously told me that he had difficulty keeping some clients due to competition from accountants who would provide their clients with whatever figures they wanted. My friend was able to confirm that Mr Y had been named as one of these accountants. Mr Y does not appear to charge very much, has no professional qualification, and kept no working papers in the case that I dealt with. He is uncertain whether he lodged Mr M’s tax returns; in one letter he said that Mr M prepared his own returns but, in a later one, said that copies of the tax returns had been returned to Mr M. Whatever the truth, the figures in the tax returns matched those in the annual accounts that Mr Y signed. I suspect he ensures that he is not named as tax agent, so that any risks lie with his client. I also suspect that this accountant is providing his clients with “off the shelf” accounts that give whatever figures his client requests. Such accountants as Mr Y can dispense with bank reconciliations, cashbooks, and vouching. He provides figures that are ready made to suit his client’s needs: high profits for the bank and to attract potential investors and low profits, or even losses, for tax purposes and loss claims. In the recession, accountants such as Mr Y should do very well.

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