Reconstruction of accounting - Do not let poor bookkeeping put your business at risk

8.3.2017

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We can resolve potential problems and consequences through an inspection or reconstruction of the accounting.

Introduction

Who to entrust with the company’s accounting is a decision taken by every entrepreneur. In practice there are two choices: using an internal accounts department or outsourcing. In either case, it must be remembered that the responsibility for keeping the accounts is borne by the statutory body of the accounting unit.

And what are the results of poorly managed or ambiguous accounting? Act No. 563/1991, on Accounting, as amended, lists administrative offences in Section 37, Section 37a and Section 37aa. When a breach of the accounting principles set out under the Accounting Act in the aforementioned paragraphs occurs, the tax office - who are tasked with hearing the administrative offences - will impose a fine amounting to 3-6% of the value of the total assets. The penalty is therefore dependent on the sum of the company’s overall assets, stocks, receivables and funds.

Are you worried that your accounting is not being done properly? Has the tax authority already come across significant inaccuracies when checking your accounting unit? Have you had a loss of electronic data without back-up? Don’t despair! It can all be sorted out by reconstruction of accounting..

Reconstruction of accounting is also applied in other cases. Sometimes it is necessary to return to earlier years because:

  • the inventorying of the balance sheets on the balance sheet date is not available, i.e. the balance is not supported with evidence,
  • the accounting shows discrepancies and is significantly incomplete,
  • generally binding accounting principles have not been followed,
  • the accounting unit did not conduct proper accounting as a result of the conversion of an enterprise etc.

Progress of the job

A key decision before the reconstruction can get underway is how far back to go. The decision is governed by the nature of the accounting books, which must respect the principles of continuity from one accounting period to the next. The reconstruction of a single period resolves nothing if we introduce to the period an unverifiable status of the balance sheet accounts, and at the same time we do not want to overburden the company with tax by using possible allowances above the financial result. A key input in the decision is therefore a thorough analysis of individual accounting periods. This will also indicate to us whether it is sufficient to correct the defects in the existing accounting records.

Once it is clear that the existing accounting cannot be used and we have chosen our starting point, then we can get on and begin the actual reconstruction of the accounting. The process is difficult and relies on the active participation of the representative of the accounting unit and the people who were familiar with transactions conducted during the reconstructed periods. Crucial for any reconstruction is for the accounting unit to have archived all its documents and that it has available original documents or their copies. Where this is not the case, it is necessary to request such documents from other parties; however, a reconstruction carried out under these circumstances cannot guarantee a positive result.

Accounting events are newly recorded and accounted as they arose, i.e. how they should have been accounted. We first proceed from primary transactions, such as invoices received, issued, bank statements, till receipts and internal documents. This is followed by secondary accounting, e.g. matching up documents and checking the balances of individual accounts.

The result of the reconstruction is a new balance sheet that is documented and verifiable. The new balances are subsequently taken forward into the current accounting period.

Conclusion

Although reconstruction of accounting is not a simple or inexpensive matter, in a great many cases it is essential to perform. Not only because of the disproportionate financial impact on the company, but first and foremost because of the personal responsibility of the statutory body.

Investing money in this way can resolve problems in the past and solves the need to sort out such problems in future. At the same time, travelling the route of reconstructing faulty accounting makes matters much easier when entering into administrative proceedings, since the legal person has undertaken every effort that might be asked of them to prevent any breach of their statutory duties.

If you are dealing with a similar situation, then please don’t hesitate to contact our team of qualified experts comprising accounting and auditing specialists.

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