Supporting the Checkers - Time to Restore Confidence in Construction Company Accounts?
My firm is regularly asked to go into construction companies and verify that balances shown in a company’s accounts as debtors and work in progress balances are accurately stated and are actually recoverable. If you think about it, any bank lending money in reliance upon a set of accounts needs to be sure that there are no “creative figures” included in the numbers.
Debtors and work in progress form an integral part of the assets of a construction company’s balance sheet. These same balance sheets are looked at by credit referencing agencies and insurers to set levels of credit either on a recommended and/or insured basis. So, making sure that a company accurately states the correct value of its debtors and work in progress in its accounts is rather important.
Now you could say that if you are looking at a set of audited accounts this is totally unnecessary. But is it really? Why should we expect a chartered accountant to be able to look at a construction contract and determine whether amounts claimed by the company are actually recoverable?
Are accountants really trained in construction law, quantity surveying and the commercial management of construction contracts? I don’t think so. I am sure there must be a book out there on DIY dentistry but you won’t catch me doing my own fillings any time soon. So why do we expect auditors to provide verification of balances due under contracts?
Every time our industry has a major failure, one of the first things we all look at is the company’s last set of accounts. We have a culture of “blame and claim” in the UK so understandably accountants are increasingly unwilling to sign off a set of accounts unless they are completely satisfied that they are accurate.
Construction is a complex sector which relies on many elements coming together on time and on budget to allow contractors to make very modest margins on large turnovers. The model works for as long as margins remain positive and fails rapidly when negative margins burn through working capital at incredible speed.
So, let’s suppose you are part of an audit team and you are trying to verify whether a balance which is claimed to be owed on a construction contract should be included in the work in progress figures on the balance sheet. What questions should you be seeking answers to?
- Has the balance been invoiced?
- Has the balance been applied for?
- Is the debtor running an HMRC approved self-billing arrangement?
- Has the debtor issued a Payment and/or Pay Less Notice?
- Has the client “billed” in accordance with the contract (form, structure, content, time)?
- How old is the contract to which the balance relates?
- How old is the balance?
- Is the balance in respect of the original contract sum (green light), variations (amber light) or loss and expense (red light)?
- Who says the amount is recoverable?
- What evidence is available to back up the claim that the balance is recoverable?
- Is there a set off, contra charge or cross contract claim that might extinguish the balance?
- Has the client discharged all pre-conditions pre-requisite to payment?
- Has there been any material breach of the contract by the client?
- Why hasn’t the balance been pursued through legal channels?
So, if you have answered all the above questions satisfactorily and your PI insurance premiums are up to date, by all means sign off those accounts. But, if you are not sure, there is one final question to ask yourself:
- Which construction industry expert have you consulted to verify that the balance is legitimate and recoverable?
The Vinden Partnership works with accountants and funders throughout the UK to verify construction company debtor and work in progress balances.
Peter Vinden is Managing Director of The Vinden Partnership, a leading provider of dispute resolution, corporate advisory and quantity surveying services to the UK construction industry. Peter can be contacted by email at email@example.com. For similar articles please visit www.vinden.co.uk.