As AccountingWEB (of which I was an editor for a number of years) has reported this week:
This situation has rendered most of the data available at Companies House almost meaningless.
This is a fact that has been compounded by the immense difficulty that now exists in trying to establish who the shareholders in most private limited companies are.
The individual statements that should exist within a set of accounts, which are the income statement, the cash flow, and the balance sheet, do not exist independently of each other. They are, instead, intended to present a reconciled view of the trading of an entity during the course of a period which enables an informed user to establish the risk that they might take by trading with an organisation. This is a question that is impossible to answer without an income statement and balance sheet, and which is compounded if you cannot establish the identity of the people managing the concern in question.
Measures taken in recent years to reduce the amount of information at Companies House have made this risk assessment nigh on impossible. It was as if the UK government was intent on making sure that those small businesses that have to trade with other similarly sized entities should face the maximum risk from doing so, when it was clearly the government's job to achieve the exact opposite outcome.
The motivation for restoring the publication of income statements has been a reduction in fraud. That does not worry me because I celebrate is the fact that we will move one step closer to having meaningful information at Companies House as a consequence of this change.
However, there will still be problems. For example, just as the government has been intent on reducing the amount of information supplied by companies to shareholders, so have accounting regulators. As a consequence they have, for example, in recent years removed the requirement for small businesses to report in detail on the tax that they pay. This in turn means that another form of risk that such a company poses, both to the national exchequer, but also with regards to non-compliance that puts those trading with it at risk, cannot be appraised.
There is a pervasive idea amongst regulators, civil servants and accountants when it comes to full disclosure in accounting which is that it is their combined duty to minimise cost to the reporting company without ever taking into consideration the obligation that those shareholders who benefit from limited liability might have to society at large by ensuring that the entity that they own is accountable for the moral hazard that it imposes upon society at large as a consequence of their decision to trade in this way. One day, maybe, there will be a change in this attitude. I look forward to the day when that happens.
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“the moral hazard that it imposes upon society at large as a consequence of their decision to trade in this way.”
You operate through companies limited by guarantee and have limited your personal liability to £1. Does that present a moral hazard?
Yes
Which is why I publish full accounts, voluntarily, to show that I am not abusing that privilege.
Do you have a problem with that?
Accounts don’t have to be filed for until 9 months after the year end, meaning anything in them could be up to 21 months old so are hardly an up to date picture. Elsewhere you’ve criticised companies for being inadequately capitalised. That shareholders should be more at risk. You’ve limited your risk to £1.
So, yes, I do have a problem with you criticising a system which limits the risk that shareholders carry whilst at the same time taking advantage of that system by limiting your risk to £1.
First, let me point out that if you did not portray every characteristic of trolling in your comments I would take you more seriously.
Then might you suggest what I should have done instead given that entities who I have dealt with have not been willing to deal with individuals?
And might you suggest what risk I have created? Take into account the funds I tend to leave available to the organisations I run, and the fact that I massively over disclose information.
Then we could discuss things. But I warn you, if you have no serious pints to make you won’t appear here gain, because I don’t believe for one moment that you are anything but a troll.
Oh dear – John May seems to be a believer in titles and therefore the system must be perfect.
We can all rest in peace now obviously (not).
Some days it seems like the Enlightenment is truly over.
It’s also hard if you’re a creditor trying to obtain the correct information, or in my case, pick up the pieces when said debtor becomes insolvent and, where the insolvency applies the IP doesn’t seem to have a scooby who the key people working for their client are. Or, trying to work out why anyone thought selling to them was a good idea to start with.
I commented on your ‘how can we restore confidence’ post about Andrew Verity’s report on Newsnight (on iplayer)
before I read this one.
Doing basic due diligence – what does a company do, what assets does it have, what are its income and expenses, who are its owners – has become unacceptably difficult as the Companies House filing rules have been repeatedly relaxed in 2016 to reduce the regulatory “burden”. Basic accounts (only a short balance sheet), no independent audit, no directors statement, no annual return only a meaningless confirmation statement, I could go on.
Any well managed company should be able to disclosure such information to the public once a year without any significant additional effort or expense. And it should be required and expected as part of the conditions for doing business.
I completely agree
Sorry, “in 2016” should have been edited out. There were deleterious changes before during and after 2016.
This is very welcome news. As you said, Richard, the trend was entirely in the other direction, in the blessed name of “deregulation” meaning that almost all the “accounts” filed at Companies House told their potential users absolutely nothing about the entity with which they may have been transacting. And I know that some less than scrupulous “accountancy” firms [the inverted commas are quite deliberate] sent such useless accounts (or in some cases didn’t send any accounts) to HMRC with their clients’ Corporation Tax returns – and of course the part of HMRC charged with dealing with that was constantly starved of resources to counter that behaviour.
And as regards audit, the size of companies that can “get away” with not requiring their accounts to be audited is quite astounding. I have seen accounts of companies that were employment agencies, which had eight figure turnover, a small permanent workforce, and next to no assets, which apparently did not require audit.
The proof of this particular pudding will be in policing these requirements. Call me cynical, but I’m not optimistic about that.
That makes two of us
I get the sentiment. I agree that forcing companies to publish more info is better, as a cost for the benefits of limited liability.
However, without much more wholesale reform of the accounting sector, and audit in particular, surely there’s not much benefit. I say this an accountant myself. Audit seems to be a sack of cack. I dont know how meaningful additional information would actually be.
How would you change things?
Serious question.
I suppose as a start requiring p&l, balance aheet, cashflow statement, and reconciliation between taxable profit and accounting profit on companies house. Also increasing xompanies house ability to punish non-complaince, as that is… weak.
In terms of audit reform, I think that breaking up the big4 accounting firms would be good. Aside from that, I’m not sure. I suppose that whenever I’ve been involved in being audited, it never feels that there are not many implications when controls are not followed. Auditors just care that there is a policy.
I suppose I think audit sucks. Most likely everyone else does too, and it is probably priced in. So what’s the motivation to do anything about it?
Much to agree with in your first para – I would demand a statement of source and application of funds if you can recall SSAP 10.
Re audit, I agree, it is more complicated.