As the FT has reported this morning:
Ministers are set to shelve reforms to Companies House that would have required businesses to file their accounts in a more onerous way as part of the government's attempt to reduce red tape on UK plc.
They added
Under legislation brought in by the previous government, small and micro companies would from April 1, 2027, have to disclose their profit and loss statements for the first time as part of their annual accounts.
And they noted:
But one ally of Jonathan Reynolds said the business secretary would reverse the plans in order to lighten the regulatory load on businesses. “This will not happen as long as Jonny is in place,” they said. “It doesn't fit with our plans to cut regulation.”
Labour's incompetence, plus its staggering embrace of the pro-fraud, anti-business model of corporate disclosure long promoted by some in the business community who would rather n ot be held to account for the uses and abuses that they make of limited liability, never ceases to amaze me.
So, let me pose the obvious question, which is why do we let companies keep details of much of their financial performance secret? And what might happen if we didn't?
In my opinion, there would be enormous benefits if every company, large or small, were required to file full accounts on public record. By that, I mean not just a balance sheet, but also a complete profit and loss account, full supporting notes and maybe a cash flow statement. I can offer at least five good reasons.
First, companies exist because society lets them. We give shareholders the right to limit their personal liability if the company fails. That's an extraordinary concession. In return, society has every right to demand full disclosure of how these companies perform. Transparency is the quid pro quo for limited liability.
Second, if some companies can hide their true profits while others cannot, the playing field is distorted. Public accounts mean everyone can see who is competing fairly, who might be undercutting with unfair practices, and where market abuses may be happening. In other words, open data helps genuine competition.
Third, openness encourages tax justice. One of the simplest ways to tackle corporate tax avoidance is to shine a light on it. If we all knew how much profit each company was making, it would be much harder for them to avoid their responsibility to pay tax. Public scrutiny is often a far more powerful deterrent than any audit.
Fourth, workers, small businesses and suppliers routinely extend credit to companies, whether by providing goods, services, or simply waiting for wages. They all do so on the assumption that a company is financially sound. Full accounts give these creditors a chance to judge the risks they face, instead of being left in the dark until it's too late.
Fifth, most business leaders say they have nothing to hide. If that's true, then why not prove it? When accounts are secret, suspicion thrives. When they are open, trust can be built, and companies can demonstrate their true contribution to the economy. Why don't they want to do that, which is what the theory of 'free markets' demands?
In summary, limited liability demands full accountability. Transparency levels the economic playing field, helps enforce tax compliance, protects those who deal with companies, and builds a stronger social contract. If we're serious about having an economy that serves everyone, and not just those at the top or those who want to cheat, putting all company accounts on the public record is not just desirable, it's essential, which is why I have always done it, voluntarily
So what has 'Jonny' got against that? Could it be he's on the side of those at the top, or who cheat? What other conclusion can we reach?
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In an attempt to respond to your so relevant question, might the choice include the following?
1) Following orders
2) Ignorance
3) Seeking post-parliamentary benefit
4) Ideological certainty/blindness
5) Inadequate education
6) Political fashion/conformity
People have long laughed about the ‘two sets of books’ phenomenon. But in fact no corporate operation of any size at all manages its business with the set of published accounts in the glossy brochure. Corporate businesses use ‘management accounts’ to function, and the glossy brochure is just an assembly of approved data; and it is the management accounts (strikingly different in design and purpose from the published accounts) that inform the executives about the state of the business. The management accounts are critical In management and decision making terms; while published accounts are, in management terms, frankly useless assemblages of company data. The published accounts carefully avoid mirroring the management accounts; under the vague, but long accepted rubric of ‘sensitive competitive data’ being legitimately private (think that one right through). This conventional distinction is obvious to everyone in business, and it is accepted because it is conventional and long established. More important, it suits ‘everybody’ (everybody in the culture, and everybody has ‘kissed the ring’, because that is in everyone’s interest). Nobody deconstructs the ritual convention, because that is in nobody’s interest; at least nobody in business.
This is not an accident. It is the ritual dance in which the culture of business paints a public picture of business reality, ‘for the record’; that is only ‘for the record’. The meaning or significance of all this strange activity is never, ever discussed.
Remember too, consolidated accounts are a work of fiction for an entity that does not exist, but are legal nonetheless.
This illustrates the paucity of ideas we live with doesn’t it? The straightjacket we have put ourselves in.
It seems to be all about profit maximisation and nothing else. If markets survive on confidence (see your other post this morning) then how can deregulation contribute to that by lowering to quality of company accounts – hiding risks for example.
It’s like 2 + 2 = Fish or something. It does not make any sense.
Yes. I prepare FRS 105 micro-entity accounts for a small block of flats that I live in – not a business set up for profit. It would be easy to web-file them in their entirety, but I don’t have to. So there is no income statement filed at Companies House and the nature of balance sheet assets and liabilities is unspecified. I’m being put to a lot of trouble preparing accounts in the exact form required by some committee or other but they aren’t published because it might not suit some business types who don’t want to file full FRS 105 accounts. But it gets worse. From 2027 I will – apparently – not be able to web-file accounts at all. I will have to use software from a private company that will ‘tag’ them. The software will either have to be installed on my computer or I will have to get an on-line agent or an accountant to do it – at a cost – and I am, in fact, finding it very difficult to get this kind of assistance. The accounting data involved would almost fit on the back of the proverbial fag packet so this is completely OOT. I have been unable to get an explanation (i) why ‘tagging’ is helpful or necessary, since ‘tags’ seem to be taxonomies that can presumably be falsified, but, if it is (ii) why Companies House can’t install a ‘tagging’ system rather than forcing every registered company – thousand or tens of thousands – to use a private contractor. I am told this is to fight economic crime and increase transparency etc. – which could be done simply and immediately by web-filing the accounts in full! I have pointed out that a software company of my acquaintance with five staff can tag accounts – so why can’t Companies House do it? This may seem a bit off subject, but it is obviously part of the project to disempower the state while at the same time, rather than working for the benefit of the public, foisting responsibilities and costs onto them and subcontracting everything in a chaotic and inefficient fashion. The worst of all worlds?
Agreed.
I use TaxCalc for the job, but there is a cost. I consider it unavoidable. It beats me why for micro entities this cannot be done on line.
Leveling the playing field is I think an aspect of many kinds of business regulation that the business world likes to disguise. It sees and presents regulation of environmental, employment, product and other standards as burdens that hold back business, ‘destroy jobs’, etc – but often this is not really the case. The best businesses already act responsibly, but are undercut by irresponsible businesses. Without regulation, it’s a race to the bottom – regulation enables the best businesses to succeed, and therefore raises standards for all of us.
Can I take a similar approach with my HMRC self-assessment return?
I fear not…
As someone who has to sign-off accounts / audits (on the company side), I wholly agree. It needs to be applied to all to avoid the many abuses that occur…and to avoid (as John S Warren has said) some companies claiming that it contains ‘sensitive competitive data’ and therefore not complying. Incidentally, any such information is essentially out of date by the time reports are issued.
and by the time the Accounts are published, they are historical. Surely, given that many are VAT registered and VAT Returns must be filed within a month of that VAT quarter, full Company Accounts should and could be available much sooner. Also, as JSW states above, corporate businesses use management accounts to function – these can be readily assembled into the accounts as required by company law. Many companies do shield behind limited liability, but I always warned clients who were considering setting up a limited corporate entity, from trading as either a sole trader or a partnership, that limited liability is not a shield to hide behind, as there is also director’s liability – but without full disclosure being available to the public, ie as Richard states above, for creditors/suppliers, tax compliance and so on, there is little or no protection for those who require such.
But VAT is easy, accounting judgements are not. I am not sure I agree with you. 10 months is too long, I agree. But, five is often necessary, I think. I could do that, but rarely do. There are always more interesting tasks…
I agree that VAT is easy, but provides basic figures, but in a well run company, regular management Accounts and ongoing and regular discussions as to judgements should be a fact – but I maybe many companies are not well run, nor well organised? I dealt with some travel companies where figures and Accounts had to be submitted to ABTA and the CAA in a very short time – I cannot remember what the filing period was, but it was all hands on the deck and working late into evenings, weekends and early mornings.
We will have to disagree: I dealt with many companies were determining income, stock and WIP took some considerable time at the year end. Those things have no impact for VAT or ABTA, but they do matter for financial accounting where management accounting approximations will not do.
Well run companies already have a regularly updated P&L (although for SMEs, cash flow forecasts are usually far more important). So the ‘regulatory load’ for filing this information would be pretty minimal. In reality, the only companies benefiting from not doing this will be those that are either badly run or with something to hide.
It seems that even small steps towards sorting out the hot mess that is regulation of UK companies are too scary for this so-called Government.
The load is non existent: these documents have to be prepared for shareholders. It takes more time to elimiate them than it does to file them.
A profit and loss statement doesn’t show true profits either. They should have to publish their total taxable profits.
Taxable profits are not true profits.
But I do think a full tax note should be required in accounts reconciling the two, and this should be true for any size of company.
If you should ever find yourself in front of a class of Key Stage 5 youngsters, and get asked this question, how will you respond? “If the UK has an internal budget deficit; and, an external deficit; how can it create a “National Wealth Fund”. (UK Internal deficit is currently circa 5%; external deficit circa 3% ).
This class will have already researched to three decimal places, the dichotomy of the privatisation of North Sea Oil and Gas mining; vis a vis the UK privatisation of and the Norwegian privatisation of.
They will know that Norway has the largest Sovereign Wealth Fund globally, based on the fact that it not only has a tax take from its bit of the North Sea but retained a very large share holding in it to collect the dividends. Both countries have lifted similar quantities over the last five decades. Norway has collected more than three times the income from each Barrel (BoE) than the UK.
The UK did the opposite. Selling its part of the North Sea for pennies in the Pound to finance tax cuts for the top five percent of the economy. The result being the UK North Sea hydrocarbons are now owned by foreigners and often their own sovereign government wealth funds.
I sincerely hope that this class of Key Stage fives, ends up running the UK government and its Civil Service. Assuming the UK hasn’t been bought out by US Private Equity and “asset stripped and indebted even further.
I like that…
maybe ‘things’ have changed since my younger days – certainly accounting regulation has since I qualified as a Chartered Accountant in 1967 — possibly working overseas, for example France, Italy, Austria etc (all before the EU) and also in such as South Africa and a few other ‘places’ has affected my judgement – but of course (I hope) I give in gracefully!!
It’s always ok to have different views.
Hi Richard. Been here a while but first time commenting. This article has prompted me to agree that crypto (currency) has no value. But the Blockchain that it’s built upon is designed to be open for all to see and impossible to change (after the event). Could this technology support the arguments above, but prompt a new video or post about crypto from a different angle? Adopting the technology, without the coins that inevitably seem to come with it.
The claimn for Blockchain is faklse.
It is there for all to see, but equally, the data in it can’be be comprehended as it is in code.
What is mmore, it can be ‘forked’. In other words, the code can be split and differing branches can be created.
I would suggest it is a perfect basis for fraud.
That’s not really correct. The underlying technology of (a) blockchain can be used to store anything in a distributed fashion. A spreadsheet doesn’t have to be used to store financial records, nor does a blockchain. You don’t have to understand the code that was used to create your spreadsheet software to be able to read the data within one. And in fact there are lots of implementations of different spreadsheet software that can read an “Excel file” (Excel surely being the dominant software nowadays) because the specification for what an Excel file looks like is documented, allowing you to use “Libre Office” or lots of other pieces of software to read the data somebody else created in “Excel”.
Yes, the code for “Blockchain” (capital B) can be forked, but that doesn’t mean that all the other participants in the system would suddenly be using your newly forked (and presumably, modified) version of the code, so somebody forking the code doesn’t have any impact on the rest of the existing system.
We will have to disagree