In short, not normally unless they are a licensed insolvency practitioner. Accountants often train to be Insolvency Practitioners but they tend to do one or the other as a full time profession. The important thing to remember is unless they are insolvency practitioners then they shouldn’t really advise on what is the correct course of action if the company experiences financial distress to such a degree that it is in effect insolvent. However, they do sometimes say that you should just dump the debt by doing a liquidation restart or a pre pack administration. Accountants do not know much about other rescue mechanisms such as the Company Voluntary Arrangement (CVA). Some accountants will recommend an insolvency practitioner that they know but always seek a second opinion. Once your company is insolvent then you have a legal duty to act in the best interest of the creditors.
Are Accountants Responsible For Mistakes?
We often hear that a company has got into financial trouble because the accountant has failed to do their job properly or given poor advice.
The accountant is an ‘agent’ of the business
In law, and in the eyes of HMRC, an accountant that is filing financial documents for a company is doing it as an “agent” on their behalf. As such, any mistakes or advice followed is the responsibility of the company. Consequently, any fines and penalties will need to be paid by the company.
Can I sue my accountant?
You can try! They will have professional indemnity cover that will pay out if they are shown to be negligent. That said the best way to avoid problems is to hire a reputable accountant and make sure that you don’t mentally “check out” of any responsibility for the overall finances of the company.
Many entrepreneurs are great at running businesses and selling products but useless with numbers. If you have no interest in the “boring” numbers make sure there is someone in the business who does! So, don’t just leave it to your accountant who may just report once a year.
What about if the company becomes insolvent as a result of my accountants mistakes?
Accountants do not know everything about insolvency! Following the increasing numbers of insolvencies of limited companies, accountants are being warned to be vigilant, as many insolvent companies are blaming their accountants for poor advice.
In many instances illegal dividends and loans are being made to company directors as a way of reducing tax payments. A dividend becomes illegal if the company does not have enough profit to cover it. This can easily happen if the company was making good profits in the past and the directors have continued to withdraw dividends, despite the financial picture changing dramatically. This can result in directors owing the company money that will have personal implications if the company goes into liquidation. The liquidator will seek to recover monies on behalf of the creditors.
It should be remembered that a company director has a legal duty to act responsibly. If a company becomes insolvent ( ie meets any one of the insolvency tests ) then the legal duty of the director changes and they must act in the best interests of the creditors (all of them being treated in the same way). If the directors do not act in the creditors’ interests and they act “wrongfully”, then they can be made personally liable for the company’s debts from the time they knew the company was insolvent!
So saying my accountant told me to do it may not impress a creditor, liquidator or judge in a civil law action.