Back in the balmy days of last summer, we received a call from a reader asking whether he could have a set of our published sales and margin figures covering the last 12 months, the idea being that he could show his managers how much better their forecourts were doing than the industry average. When we asked whether he was interested in any of our services, the answer was a polite “No thank you”. So, having e-mailed him some statistics, we received a nice thank you note in return, and that was that.
Cut to the cold, dark days of late autumn. A surprise call from Tim; he sounded slightly concerned. The gist of his query being that although his own monthly figures still looked pretty good compared to ours, his accountant had called to say that the latest financial accounts were now almost ready, but that there was a ‘slight problem’ in that the accountant, who also acted as auditor, was reluctant to sign the audit report before he had met with Tim to discuss ‘solvency’ and ‘going concern’ issues. By the end of our conversation Tim had invited one of our business consultants to give a second opinion on his figures.
At first glance Tim’s in-house management reports did indeed look quite impressive: full trading results and a balance sheet every three months, plus various monthly sales and stock reports. It was only when he showed us two years’ audited figures and the draft financial results for the previous year that things started to look a little odd. Among the oddities that we found were the following:
The auditor had done a proper job on the sales ledger each year – having written-off some £3,000 in shrinkage over the past two years.
Likewise, over two years there had been at least £1,000 of fuel-card transactions ‘lost’ in rejections from the card companies across the three sites in the group; the auditor had written these off, but they were still being shown on the management reports.
The previous year’s audited accounts included a stock write-off of almost £2,000, in relation to out-of-date grocery items that were still itemised on the latest stock reports, and news items that were simply shown as a lump-sum value.
Tim had not drawn any ‘salary’ for several months during the year, instead he recorded some £8,000 in cheques that he had still paid to himself as ‘Directors Loan Repayments’ in his computer accounts, under the impression that he could ‘save PAYE’ by doing so. Quite correctly his auditor had realised that there was already an overdrawn balance on the director’s loan account and that these payments had to be treated as wages – with the accompanying PAYE/NI added into the final adjustments.
The ‘Other Sales’ value of £6,500 on the print-outs turned out to be the proceeds of a part-exchange involving Tim’s wife’s old car; the car was actually in the books at £7,000.
Tim’s PC-based management accounts depreciated his ‘fixtures and fittings’ and ‘equipment’ at an annual rate of 10 per cent. His auditor had used a rather more prudent rate of 20 per cent. Given that the assets had originally cost around £100,000, the result was that Tim ‘saw’ £10,000 less depreciation each year than his audited accounts showed.
That little lot alone – and there were more – comes to £31,000 of audit adjustments; the auditor had done a good job – but then you’d expect that if you were paying £12,500 a year just for a single set of accounts and an audit of three small-ish petrol forecourts. It’s too early to say whether Tim will survive the experience – at the moment we’re treating his business as if it were in intensive care, and going in each month to ensure that everything he’s putting into his PC is correct; apart from anything else we reckon that having found that his staff were dumping a large proportion of ‘news sales’, which weren’t set up on his stock system, into a ‘VAT-able’ button on the epos, we will probably save him at least the cost of our services.
The moral of this story is that unless your on-site accounting reports are regularly verified and kept in line with any end-of-year financial adjustments made by professional accountants, then you could find yourself like Tim, sailing along completely deluded by some impressive-looking, but totally flawed, financial information.