Accountants responsibilities when things go wrong?

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Gobsmaked

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After being asked to support a SME review their business model it has become clear quickly that the MD is not financially competent when it comes to understanding P&L's and Balance Sheets. They also haven't got an effective cash flow model.

After having had doubts about the quality of the financial statements I asked an experienced accountant (not the one employed by the SME) to review the accounts. We quickly spotted that the company is effectively insolvent (or close to insolvency) due to a combination of repeated double counting of invoices caused by the MD’s spread sheets and a spend rate which has exhausted shareholder funds and broadly matched current income.

This double counting has created a completely unrealistic debtors position. This mistake is repeated over a 5 year period. My experienced accountant challenged the figure within 20 minutes of working through the P&L and Balance Sheet and then within 2 hours had isolated the issue.

In addition there are some concerns about the way in which the MD has used director’s dividends every month to reward their performance (tax issues) and a combination of credit cards and petty cash to fund personal purchases not related to the business.

So all in all some major concerns.

On the assumption that I'm clear where the responsibilities lie opposite the MD I'm interested in your thoughts re what redress we might have against the accountancy firm who have (in my view) been negligent in their understanding and assessment of the business health of the company.

Clearly in the financial statements there are all the usual caveats re working under the instruction of the MD, only reporting what they were given to report etc but in my view they were not asking the questions that I think a reasonably well qualified accountant should be asking of an MD. My intervention and the experience of my accountant colleague spotted the issue very quickly, they haven't spotted it in 5 years. Is there any action I can take?
 
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Are you a shareholder in this enterprise, if not you've got no recourse.

It seems that the accountant was remiss (from the story you've told, just got to point out that there is only one side posted here).

Was it an audit or an audit exempt assignment?

Are there shareholders other than the directors?
 
Working with and on behalf of one of 4 shareholders, the MD is one of the 4 and is the only Director.

Audit exempt.

Shareholders are considering what options are open to them....

I have no ownership in and/or financial interest in the company.
 
Gobsmaked said:
After having had doubts about the quality of the financial statements I asked an experienced accountant (not the one employed by the SME) to review the accounts.
Click to expand...

Are you talking about an accountant who is employed by the company or an accountant who is supplying professional services to the company?

Is the accountant a member of one of the professional accounting bodies?

Have you seen the terms of engagement for the accountant, what services was he expected to supply?

Have you seen all the correspondence from the accountant, minutes of meetings and so on?

At the end of the day, if the shareholders appointed an incompetent director and accepted unaudited accounts... they are going to have a hard time getting anywhere without showing serious misconduct on the part of the director!

Jim.
 
Accountant supplying professional services, a member of all the relevant professional accounting bodies.

No I haven't or the shareholders havent seen all correspondence from the accountant....
 
Well, in that case I'd suggest the first thing you need to do, is gather all the facts before you start jumping to conclusions.

In addition you also need to get proper legal advice and proceed with great caution! The director is now aware that the company is insolvent and should the company continue to trade, he may render himself personally liable for the debts of the company. Furthermore, if part of the argument is going to be that proper books of account were not kept, then that will be an issue for the director as well!

When it comes to the accountant, I expect you'll find that he is well covered in the sense that he provided the services as requested and on the instructions of the director. You may well find correspondence seeking clarification and confirmation of figures etc... The guy is a professional accountant and as such I would not for a minute assume that he has left himself open to an easy case of negligence. Even if you have a case, you can expect that it will be a very expensive exercise.

Then there is the relationship between the directors and the shareholders, since there was not audit it would seem that the shareholders have no recourse to the accountant and can only go after the director, if at all. How is that going to sit with everyone?

Bottom line, this is something you need to seek legal advice on and not opinions from a forum such as this.

Jim.
 
Agree with Jim2007.

A company has to have 2 directors, who is the second director? how much input do the shareholders have, could they be considered shadow directors.

Need to get all the facts together
 
If it can be shown that an accountant is incompetent or has behaved in an incompetent manner then you can claim against his professional insurance.
I am aware of one case where this was done successfully. To be clear; the accountant must have been provided with all relevant/requested data.
 
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