There are plenty of jokes and stereotypes about accountants, but the one I think that best sums up what accountants actually do concerns a hypothetical argument between an accountant and a tax inspector. It goes a bit like this:
An accountant and a tax inspector are arguing over what came first; tax or accountancy. The accountant argues that before Adam and Eve, God had created order from chaos and thus the universe was born. This orderly universe surely implied the involvement of accountants to monitor and keep track of developments, he argued. By definition, some of God’s angels at the time must have been accountants. There were no taxes and therefore no need for tax inspectors at this time.
The tax inspector listened patiently until the accountant had finished making his point and then calmly replied, ‘Who do you think created the chaos?’
This amusing allegory perfectly illustrates the relationship between accountants and the rules-based systems that they work within. The point here is that the constraints that the rules create, and the often-severe consequences for not adhering to them, necessitate the need for accountants.
What is an accountant?
As defined by Wikipedia, accountancy is ‘is the measurement, disclosure or provision of assurance about financial information that helps managers, investors, tax authorities and others make decisions about allocating resources’.
But what do accountants actually do? Well, as it turns out, counting beans doesn’t really come close. To understand the complex and esoteric world of the accountant and how can help you and your business, we need to break down the practice of accountancy into its three constituent parts.
Financial accountants prepare and submit statutory financial information that is required by law to meet the specific standards and guidelines of any given tax jurisdiction. These standards are known universally as Generally Accepted Accounting Practice (GAAP). In the UK, the body of legislation that governs the minimum standards by which accounts must be prepared is laid down in the Companies Act 2006. The chief standard setter is the Accounting Standards Board, which is part of the Accounting Standards Committee.
Financial accountants are bound by these laws and the accounts they produce must meet the standards laid out in them. The accounts of any limited company are required by law to be filed with the Registrar of Companies who will then make them available to the public through Companies House. In any set of financial accounts the reporting requirements of profitability, liquidity, solvency and stability must be met.
At the end of each financial year limited companies must prepare statutory annual accounts which must be sent to shareholders, anyone who is able to attend the company’s general meetings, as well as Companies House and HMRC.
The sole purpose of statutory accounts is to report on the taxable profit of the business and report any corporation tax owed. Statutory accounts must include the following:
- A balance sheet
- A profit and loss account
- Notes to satisfy regulations and disclose relevant information
- A directors’ report
- An auditors’ report (unless the company qualifies for exemption)
- Name and signature of the company director.
For most small business owners financial accountants will be the only type of accountants you deal with and will help your company fulfil its legal duty to produce annual accounts.
Unlike financial accounting, management accounting is not a legal requirement. Management accountants fulfil the purpose of supplying financial insight to key decisionmakers within an organisation, often reporting on specific assets or areas of interest for operational, budgetary or strategic purposes. Unlike financial accountants, the work of management accountants is often highly confidential and seen only by senior management and directors within the company.
Management accounting’s driving force is its ‘forecast value’, as it allows the executive to assess the future value or profitability of specific areas of the company. For this reason management accounting reports can take place over any time frame, from days to decades, as the task in hand requires. Because management accountants work within the financial framework and structures of an organisation, they are not bound by external rules and regulations.
Audit and forensic accounting
Auditors are individuals brought into another business to scrutinise their books, bank accounts and other documents to ascertain whether their reported financial position is a true representation of their actual financial position. In this sense auditors can be seen as financial inspectors, who gather evidence, assess it and make a judgement based on what they have found.
Being audited is a legal requirement for any company who has something to gain by misstating financial information to mislead shareholders or stakeholders, and possesses the power to do so.
Forensic accountants fulfil a slightly different role in that they are called in specifically to investigate a financial loss, fraud or a tax dispute. Unlike auditors they are not a legal requirement and are there to go over finances in meticulous detail, usually as the result of a legal dispute or suspected criminal activity.
What can an accountant do for my small business?
Of course, for most small business owners, dealing with audits and using management accountants is another world. Most likely you will probably just want to know when you should look to get an accountant and what they can do for you and your business when you do get one. Below, I’ve broken down just a few of these.
- Completing your HMRC self-assessment
Sole trader or huge limited company, we all have to jump through HMRC’s hoops and submit a self-assessment. Getting an accountant to do it for you will not only save you time but make sure you don’t get any of it wrong, which could result in HMRC sending it back, or worse still a fine.
- Preparing and submitting your annual statutory accounts
Submitting and preparing statutory accounts is an important task and will go on the public record so it’s vital you get an accountant to look after this task for you as getting it wrong can end up causing you a lot of trouble.
- Minimising your tax bill
Any accountant will be able to advise you on how best to minimise your tax bill at the end of the financial year. This doesn’t involve siphoning your money off into some complex offshore tax avoidance scheme but can involve a few relatively simple things that will help you keep your tax outlay to a minimum.
- Help with financial business decisions
Accountants aren’t just there to fill out forms and submit your financial accounts, they can also advise you on financial matters and help you prepare for things like applying for a loan. Ultimately they are there to help you grow your business.
If you’re looking for an accountant make sure they are a chartered accountant. This will involve them being members of one of the following bodies and having the relevant accreditation after their name:
- Institute of Chartered Accountants in England & Wales (ACA or FCA)
- Institute of Chartered Accountants of Scotland (CA)
- Chartered Accountants Ireland (ACA or FCA)
- Chartered Certified Accountants (ACCA or FCCA)
- Institute of Financial Accountants (FFA or AFA)
- Association of Certified Public Accountants (ACPA or FCPA)
- Institute of Certified Practising Accountants (ICPA)
So as this not so brief summary should have shown, it’s not all about counting beans. Accountants might be a necessity and you may well resent having to fork out for one, but if you plan to grow your business then it’s likely that you’ll be seeing a lot more of them.
Andy Hyland is owner and director of AK Tax.