Obstructive Accountant

[GLAbusiness]

An issue is if a financial agent is implementing changes to financial recording, such as journal adjustments, then the client really should be able to see that regardless of ownership. The client has to sign off the accounts as true and fair and companies act compliant in any event.

This was the point I was trying to make. Elliot has expressed it much more clearly than I managed

 

[Ziggy2024]

"The accountants working papers (simply, how they amended the core data to the figures in the accounts) belong to the accountant".

Not necessarily. It depends on the engagement letter as to how the division of ownership of papers is determined. Sometimes an engagement letter can be silent on this point.

The other point is in what capacity is the financial agent acting ie. as principal or agent can have a bearing on the ownership of documents created.

An issue is if a financial agent is implementing changes to financial recording, such as journal adjustments, then the client really should be able to see that regardless of ownership. The client has to sign off the accounts as true and fair and companies act compliant in any event.

The fascinating feature of the ownership debate that can be overlooked sometimes is that the information created is data that the financial agent owes a duty of confidence to the client over.

What you are quoting is a different nuance to my actual comment.

My comment related to a backup of accountant data being available to the client. This is not something that a client is entitled to.

Providing opening balances is a different matter, but would not be a copy of a physical database or software maintained by the accountant.

Accounting working papers belong to the accountant, there is no debate on that.

There is a disconnect on this thread, the original question was in relation to software and that is the question I've answered. There are connected questions / debates but that's not what was asked.

 

[Elliot Green]

What you are quoting is a different nuance to my actual comment.

My comment related to a backup of accountant data being available to the client. This is not something that a client is entitled to.

Providing opening balances is a different matter, but would not be a copy of a physical database or software maintained by the accountant.

Accounting working papers belong to the accountant, there is no debate on that.

There is a disconnect on this thread, the original question was in relation to software and that is the question I've answered. There are connected questions / debates but that's not what was asked.

Apologies if I took your comment off on the wrong tangent.

However, I respectfully disagree with this comment:
"Accounting working papers belong to the accountant, there is no debate on that."

There is a debate that has developed extensively in this area.

The potential problem with it is the arguably nebulous term "working papers".

Unless or until one deciphers the classes and categories of documents, the term has potentially limited utility. It is not uncommon (particularly in the days of paper files but it still applies) for a file to be collated and for it to be labelled the Working Papers, when in fact it can be a collection of papers owned by more than one party ie client and financial agent. The 'label' is not dispositive.

I have litigated this type of ownership issue in a different context - see Green v Chubb [2015] EWHC 221 (Ch).

An interesting insight into this topic can be found here:

https://www.serlecourt.co.uk/images/uploads/documents/Mine_-_Ownership_of_the_client_file_17_Feb_06.pdf

 

[Elliot Green]

That would be a problem. But the solution lay at the beginning of the relationship with the accountant/advisor, when sauch matters shoud have been agreed.

I note what you say but do most SME clients have the understanding of Section 386 and 393 of the Companies Act 2006?

The other point is how easy is it for a lay client to dictate the terms and conditions to their financial agent? Many *might* turn them away and may say "sorry chaps and chapeses but we require *our terms* to be signed due to PI conditions".

 

[Daybooks]

"The accountants working papers (simply, how they amended the core data to the figures in the accounts) belong to the accountant".

Not necessarily. It depends on the engagement letter as to how the division of ownership of papers is determined. Sometimes an engagement letter can be silent on this point.

The other point is in what capacity is the financial agent acting ie. as principal or agent can have a bearing on the ownership of documents created.

An issue is if a financial agent is implementing changes to financial recording, such as journal adjustments, then the client really should be able to see that regardless of ownership. The client has to sign off the accounts as true and fair and companies act compliant in any event.

The fascinating feature of the ownership debate that can be overlooked sometimes is that the information created is data that the financial agent owes a duty of confidence to the client over.

"The accountants working papers (simply, how they amended the core data to the figures in the accounts) belong to the accountant".

Not necessarily. It depends on the engagement letter as to how the division of ownership of papers is determined. Sometimes an engagement letter can be silent on this point.

The other point is in what capacity is the financial agent acting ie. as principal or agent can have a bearing on the ownership of documents created.

An issue is if a financial agent is implementing changes to financial recording, such as journal adjustments, then the client really should be able to see that regardless of ownership. The client has to sign off the accounts as true and fair and companies act compliant in any event.

The fascinating feature of the ownership debate that can be overlooked sometimes is that the information created is data that the financial agent owes a duty of confidence to the client over.

Off topic to continue but this is an excellent point about agent or principal.

In general if I take responsibility for recording their day to day transactions ( i.e. their bookkeeping ) then I see that as “agent” and in the event of termination of services would ensure they have all records to continue - even if that is manual ledgers.

If I am to perform the function of taking their records and completing a full compliant set of accounts ( sometimes referred to as from trial balance ) then I would deem that as “principal”. The output of that work would include the journals needed and final schedules and belong to the client but not working papers produced by me to arrive at those figures. The reason being the day to day transaction recording is “matter of fact” whereas the latter requires understanding concepts, principles and applying judgement. My letters of engagements would reflect this.

I think it might be difficult to argue that this phase of the work is “principal” if already producing the main bookkeeping in an agency capacity.

Is there an argument that says as the responsibility of keeping records is that of the company and its directors and cannot be delegated then bookkeeping services can only be performed in an agency capacity; regardless of what a contract might say?

Does that “duty of confidence” extend to free access to those records maintained on their behalf?

PS Not read your case law yet. Looks interesting so will do.

 

[Elliot Green]

Off topic to continue but this is an excellent point about agent or principal.

In general if I take responsibility for recording their day to day transactions ( i.e. their bookkeeping ) then I see that as “agent” and in the event of termination of services would ensure they have all records to continue - even if that is manual ledgers.

If I am to perform the function of taking their records and completing a full compliant set of accounts ( sometimes referred to as from trial balance ) then I would deem that as “principal”. The output of that work would include the journals needed and final schedules and belong to the client but not working papers produced by me to arrive at those figures. The reason being the day to day transaction recording is “matter of fact” whereas the latter requires understanding concepts, principles and applying judgement. My letters of engagements would reflect this.

I think it might be difficult to argue that this phase of the work is “principal” if already producing the main bookkeeping in an agency capacity.

Is there an argument that says as the responsibility of keeping records is that of the company and its directors and cannot be delegated then bookkeeping services can only be performed in an agency capacity; regardless of what a contract might say?

Does that “duty of confidence” extend to free access to those records maintained on their behalf?

PS Not read your case law yet. Looks interesting so will do.

The way I see the points you raise is if you work directly on the client’s books then ordinarily it is difficult to see how that is done as principal. Imagine a car mechanic working on your car’s gearbox and then saying ‘oh by way Mr/Mrs Daybooks, as I own the oil that I replaced when fixing the gearbox, we now have joint ownership of the gearbox’. Plainly that would be a remarkable proposition.

I do not accept however prima facie that the production of a compliant set of accounts means the work is done as principal simply by virtue of the financial agent’s understanding of accounting policies and accounting principles. That appears to be confined to matters of knowledge and its associated application, which in itself does not translate into ownership of a document. Granted you could usually conceivably structure contractual relations so as to resolve by agreement with the client that a given piece of work is subject to your ownership.

However, here’s the thing. Say you produce a set of accounts which encompasses the metamorphosis of the prime books into the finished product ie. going from nominal ledger to final accounts. It seems to me that you could as a matter of contract resolve that the journals (for example only) that account for the metamorphosis, are the financial agent’s property (some financial agents appear to do something like this perhaps by claiming ownership of the lot through the deployment of the expression ‘working papers’). But the problem for me is this, the client still has to declare on the balance sheet its compliance with Sections 386 and 393 of the Companies Act 2006. The potentially remarkable paradox is if a financial agent organises the engagement with a client making the standard balance sheet declarations on the one hand and on the other hand, how does this arise if the client cannot properly make such declaration(s) (particularly where Section 386 is concerned) if the client does not own all of the relevant documents it needs. If the client does not own the journal documents say, then it could perhaps be argued they have not maintained proper books and records.

You ask about the notion that bookkeeping might only be possible to be performed in an agency capacity. As a matter of contract, I do not think that has to be the case. The mandatory legal requirement under Section 386 appears to be separate from the mechanism by which a director enables such compliance. They could do it themselves or they could instruct a professional to do it. My understanding is that the problem could be that the interpretation of matters of contract derives from the ordinary meaning of the words deployed, not necessarily the intentions per se of one of the parties entering into that contract.

As for a duty of confidence, no, in my view a duty of confidence does not extend to free access to records maintained on the client’s behalf. However, the question is what is meant by “free access”. Being real about this, providing a client with their full ‘file’, particularly in this electronic age is something in most cases that can be facilitated in matters of moments rather than something that is necessarily time-consuming.

Disclaimer: I stress the above are my views only and provided for general information purposes only as part of an interesting discussion and debate on this topic. No liability is accepted for reliance upon those views or information. They are not to be relied upon. This is not legal advice. Anyone reading this post should not apply those views to the facts of their case but instead should seek independent professional advice on the discrete facts of their case.

 

[Daybooks]

The way I see the points you raise is if you work directly on the client’s books then ordinarily it is difficult to see how that is done as principal. Imagine a car mechanic working on your car’s gearbox and then saying ‘oh by way Mr/Mrs Daybooks, as I own the oil that I replaced when fixing the gearbox, we now have joint ownership of the gearbox’. Plainly that would be a remarkable proposition.

I do not accept however prima facie that the production of a compliant set of accounts means the work is done as principal simply by virtue of the financial agent’s understanding of accounting policies and accounting principles. That appears to be confined to matters of knowledge and its associated application, which in itself does not translate into ownership of a document. Granted you could usually conceivably structure contractual relations so as to resolve by agreement with the client that a given piece of work is subject to your ownership.

However, here’s the thing. Say you produce a set of accounts which encompasses the metamorphosis of the prime books into the finished product ie. going from nominal ledger to final accounts. It seems to me that you could as a matter of contract resolve that the journals (for example only) that account for the metamorphosis, are the financial agent’s property (some financial agents appear to do something like this perhaps by claiming ownership of the lot through the deployment of the expression ‘working papers’). But the problem for me is this, the client still has to declare on the balance sheet its compliance with Sections 386 and 393 of the Companies Act 2006. The potentially remarkable paradox is if a financial agent organises the engagement with a client making the standard balance sheet declarations on the one hand and on the other hand, how does this arise if the client cannot properly make such declaration(s) (particularly where Section 386 is concerned) if the client does not own all of the relevant documents it needs. If the client does not own the journal documents say, then it could perhaps be argued they have not maintained proper books and records.

You ask about the notion that bookkeeping might only be possible to be performed in an agency capacity. As a matter of contract, I do not think that has to be the case. The mandatory legal requirement under Section 386 appears to be separate from the mechanism by which a director enables such compliance. They could do it themselves or they could instruct a professional to do it. My understanding is that the problem could be that the interpretation of matters of contract derives from the ordinary meaning of the words deployed, not necessarily the intentions per se of one of the parties entering into that contract.

As for a duty of confidence, no, in my view a duty of confidence does not extend to free access to records maintained on the client’s behalf. However, the question is what is meant by “free access”. Being real about this, providing a client with their full ‘file’, particularly in this electronic age is something in most cases that can be facilitated in matters of moments rather than something that is necessarily time-consuming.

Disclaimer: I stress the above are my views only and provided for general information purposes only as part of an interesting discussion and debate on this topic. No liability is accepted for reliance upon those views or information. They are not to be relied upon. This is not legal advice. Anyone reading this post should not apply those views to the facts of their case but instead should seek independent professional advice on the discrete facts of their case.

A lot to digest.
With regard to your first paragraph I would use the term “up to trial balance” meaning the day to day preparation and posting of the record transaction to the ledger.

In context, working from trial balance would typically be entering these trial balance figures into appropriate software and then preparing the necessary journals. Those journals would be provided back to the client to complete their records and meet their obligations. Giving them “the oil” to put in their car.

The accountant’s trial balance figures with subsequent journals would produce a compliant set of accounts but not on its own would it in my view fulfill s386 duties. The trial balance being an extract of the balances from each ledger account no longer has access to the underlying records.

However I would always agree that if working on the client’s own physical books ( in whatever medium ) should be as agent and any journal entries done constitute the prime entries. However, in my “from trial balance” scenario there is no metamorphosis of the prime books into the finished product; not by the accountant anyway.

I would still contend that taking the trial balance and working through it as outlined above, to the compliant set, could be as principal. My argument is because I am giving back to the client all they need to fulfill their duties under s386 and as you correctly point out s393. The client has a comprehensive set; the accountant only part.

I think you are right to point out the intended meaning of “working papers”. My intention is that they are typically the Excel Workbooks I have developed over a number of years that enable me to do accounts (hopefully) consistently, accurately and effortlessly. This seems to fit well with the article you provided in that “papers” prepared to assist me (the Excel Workbook) belongs to me but the output is for the benefit of the client and belongs to the client. Interestingly payment is not a major consideration. However, something for me (all) to perhaps re-word! Thus providing printed copies would not be an issue where it aids the directors’ duties, but not the “physical” Excel Workbook file as that would be an unjust enrichment.

My view is that the accountant should never obstruct the directors in the performance of their obligations; notwithstanding their professional duties.

On the subject of agents a topic for another day might be “The misapplication of ”Shaw and Others, Assignees of Howard and Gibbs, Bankrupts, against Picton” by the Judge Havery in the case of Post Office Ltd vs Lee Castleton.” Just my view of course.

 

[Elliot Green]

A lot to digest.
With regard to your first paragraph I would use the term “up to trial balance” meaning the day to day preparation and posting of the record transaction to the ledger.

In context, working from trial balance would typically be entering these trial balance figures into appropriate software and then preparing the necessary journals. Those journals would be provided back to the client to complete their records and meet their obligations. Giving them “the oil” to put in their car.

The accountant’s trial balance figures with subsequent journals would produce a compliant set of accounts but not on its own would it in my view fulfill s386 duties. The trial balance being an extract of the balances from each ledger account no longer has access to the underlying records.

However I would always agree that if working on the client’s own physical books ( in whatever medium ) should be as agent and any journal entries done constitute the prime entries. However, in my “from trial balance” scenario there is no metamorphosis of the prime books into the finished product; not by the accountant anyway.

I would still contend that taking the trial balance and working through it as outlined above, to the compliant set, could be as principal. My argument is because I am giving back to the client all they need to fulfill their duties under s386 and as you correctly point out s393. The client has a comprehensive set; the accountant only part.

I think you are right to point out the intended meaning of “working papers”. My intention is that they are typically the Excel Workbooks I have developed over a number of years that enable me to do accounts (hopefully) consistently, accurately and effortlessly. This seems to fit well with the article you provided in that “papers” prepared to assist me (the Excel Workbook) belongs to me but the output is for the benefit of the client and belongs to the client. Interestingly payment is not a major consideration. However, something for me (all) to perhaps re-word! Thus providing printed copies would not be an issue where it aids the directors’ duties, but not the “physical” Excel Workbook file as that would be an unjust enrichment.

My view is that the accountant should never obstruct the directors in the performance of their obligations; notwithstanding their professional duties.

On the subject of agents a topic for another day might be “The misapplication of ”Shaw and Others, Assignees of Howard and Gibbs, Bankrupts, against Picton” by the Judge Havery in the case of Post Office Ltd vs Lee Castleton.” Just my view of course.

Up to Trial Balance makes sense provided all transactions are included and no accruals are left hanging. If there are further accruals then work is still being done of a transaction nature.

However, whilst going to TB deals with Section 386; it doesn't deal with Section 393. Going from TB to the Section 393 position is what many financial agents may envisage as their role. However, if the TB is in final form then the notion of 'working papers' for that period is esoteric because the Section 393 compliance will inevitably involve the act of taking a final TB and slotting it into the statutory format.

Some financial agents will say they prepared working papers for their own purposes ie. as principal. Whilst that might be so, absent the contract saying otherwise I would suggest there is duality of purpose so the client can reasonably be expected to make the balance sheet declarations of statutory compliance.

 

[numbersrule]

This was resolved as the Client, the new Accountant and the Bookkeeper now all have access to the online accounting software as they should so that the team can function as it should.

The difficult situation had arisen because one individual was taking the roles of Accountant, as well as Treasurer and furthermore was also a Director.

The lack of division of responsibilities over a lengthy period of many years resulted in chaos at a strategic / structural level for the business. The state of affairs continues to unfold now that access is available in all areas.