Inadequate accounting records lead to Director’s ban

A company Director who failed to maintain adequate accounting records, thereby breaching legal obligations, has been disqualified as a Director for six years. 

Stephen Mason, who ran a recruitment agency in Glasgow, liquidated the business after just two years of trading but when asked by the Insolvency Practitioner for the company’s accounts and other records, failed to produce them.

This meant that the Insolvency Service’s investigation could not confirm whether the expenditure of nearly £5.5 million from the company’s bank account was legitimate business spending. 

The investigation identified £16,500 paid to an unknown individual, cash withdrawals totalling nearly £6,000 and £3,000 in cheque payments. 

It was also not possible to ascertain whether an income, also of nearly £5.5 million, recorded in the company’s bank account, was from genuine business sales.

As the Chief Investigator at the Insolvency Service said, companies are under a legal duty to account for their income and expenditure and fulfilling that duty is a key component of the role of a Director.  

He added that it is common for a lack of records to explain transactions to be a sign of other, more serious misconduct.

This could include removing assets and value from a firm in anticipation of insolvency or trying to pay some creditors in preference to others in a bid to commit fraud. 

However, this can be hard to prove, so finding evidence of financial misconduct is key and is best done by an experienced forensic accountant.

Roger Isaacs, Forensic Partner at Milsted Langdon, said: “Gathering evidence is a painstaking job, involving the scrutiny of any available records and relevant documentation. 

However, this case demonstrates that sometimes even the absence of evidence can be damning.

“An increasing number of cases allow the courts to draw adverse inferences in circumstances in which parties to litigation or defendants in prosecutions simply fail to disclose information that ought to be in their possession.

Indeed in proceedings under the Proceeds of Crime Act or involving Unexplained Wealth Orders, the burden of proof falls on the defendants to adduce evidence to prove that they acted lawfully and acquired their assets legitimately. Failing to put forward evidence would result in a finding against them by default”.

Posted in Blog, Forensic, The Forensic Blog.