I am passing on the warnings of Burton Sweet, Insolvency Practioners, in Shrewsbury. It highlights the need for company owners to understand their financial statements and the need for their accountants to explain what their balance sheet means.
“I have found a number of company directors who have little difficulty in understanding a profit and loss account but who clearly have little understanding of a balance sheet. There appears to be an assumption that what appears in the accounts actually exists and at the value shown, examples being leasehold improvements and goodwill, whereas reality is that somehow and for whatever reason the asset no longer exists or has a much lower value.
Directors’ current accounts are rarely understood, with overdrawn accounts being explained to me as being the amount the company owes the director. Getting to the bottom of such accounts can be a lengthy process and sometimes means investigating the account over several years. Often these overdrawn accounts are “corrected” by the declaration of unlawful dividends which a subsequently appointed insolvency practitioner has to pursue.
With most companies not needing to be audited, I wonder if less attention is being paid to balance sheet items with less need to discuss them with the directors. From an insolvency viewpoint, this can affect a company’s solvency with consequences for the director.”
