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Head in the Clouds – where are my books and records?

When most entrepreneurs dream about starting a business to achieve their goals and aspirations, they’re probably not dreaming about what books and records they will need to keep, and how to do that.  Understanding director’s duties is probably also not top of their list either!

That’s probably understandable – it’s not always the most exciting conversation, although some accountants might argue otherwise!  And most owners get a pretty good grasp of what they need to do through discussions with accountants and bank managers, and so on.  Keeping proper books and records is the most fundamental duty of directors, as it is the only consistent and understandable way to explain what the company has undertaken during its existence.

But there are a few traps for the unwary, as we have found in our many years of insolvency and forensic accounting experience, and these traps are not so much about what types of books and records you need, but rather how you need to maintain these.

Backing Up

Most small businesses run their accounts using online software such as QuickBooks, MYOB or Xero.  These great software packages are designed to be readily understood and used, easy to access from remote locations, and flexible enough to adapt to different business types.  But are you aware of some of the issues with online accounting software packages?

From a practical perspective, it’s important to realise that these software companies are generally NOT responsible for backing up your data. The responsibility of backing up data typically lies with the users of online accounting software. While many reputable online accounting software companies provide backup features as part of their service, it is ultimately the user’s responsibility to ensure the safety and security of their data. It is essential to review the terms and conditions, service agreements, and data protection policies the software company provides to understand the extent of their backup services and any associated liabilities. It is advisable for users to regularly back up their data independently to mitigate the risk of data loss.

Legislative requirements

This ties in with the requirements of the Corporations Act in Australia, which outlines some of the legislative requirements for keeping and maintaining company books and records. In a nutshell, the Act requires directors to:

  1. Keep written financial records that correctly record and explain transactions, financial position and performance, and that would enable true and fair financial statements to be prepared and audited – see Section 286;
  2. Keep electronic records in such a form that they can be converted to hard copy – see Section 288;
  3. Even if financial records are kept outside of Australia (i.e. through online software based elsewhere), there is still an obligation to keep sufficient written information about those matters within the jurisdiction, i.e. Australian states and territories – see Section 289.

We usually see evidence of the first condition, although we also see a diverse range of what businesses regard as “books and records” (which might be a topic for another blog!).  However, with the increased online software use and dependency on those software services, we are not seeing compliance with the 2nd and 3rd conditions.  Businesses can generally download the data they want from the software, so they can convert that to hard copy.  Still, they also take an enormous risk in depending on Xero or MYOB or other providers to ensure that the data is up-to-date and has not been corrupted in any way.  They don’t mitigate that risk by making regular backups of the data themselves. 

Taking backups regularly will also ensure that the 3rd condition is met, as it means that sufficient information is located in the jurisdiction.  That way, if the world as we know it goes pear-shaped and businesses can’t access Xero or MYOB, all is not lost. 

Directors’ obligation

Remember, too, that the onus is on directors to meet these obligations.  Relying on someone else to ensure accounts are updated, backups are maintained, and access is continued might be fine as a defence but does not ensure that the business’s data is readily accessible, and that’s what you need to ensure continued trading and viability.  In particular, make sure that any subscriptions to online software are in the name of the company or business and that ALL relevant personnel have appropriate access rights and permissions to use the software.  Always have at least a second person with administrator rights to jump in when necessary.

We recently had a client come to us seeking help – the husband and wife had run a business for some years, and (as often happens) the husband worked on the operations side, and the wife looked after the financial side by herself.  The marriage had broken down recently, and the wife was the only director with access to MYOB online software.  She refused to hand over access to the files, and the business was unable to manage its accounts, which resulted in major issues with customers, suppliers and employees.  Yes, there are legal options to address this, but that takes time, and the business suffers the consequences in the interim.

The consequences

So there are consequences of not being able to access or maintain books and records – from a straightforward failure to comply with director’s duties to potential insolvent trading.  This, in turn, results in further penalties that could be a fine imposed by ASIC but could also be personal liability for debts incurred either through insolvent trading or negligence.

So look at how you have set up your accounting functions, how the accounts are updated and maintained, how backups are performed, and who is actually in control of the processes.  There may well be some risks here that should be looked at and managed, and at dVT Group, we can assist you with those risks.

Should you wish to discuss books and records or the right solution for your business, please contact Suelen McCallum on 02 9633 3333 or mail@dvtgroup.com.au.

dVT Group is a business advisory firm that specialises in business strategy, turnaround, forensic investigations, and insolvency (both corporate and personal).

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About Us
dVT Group is a business advisory firm that specialises in business turnaround, insolvency (both corporate and personal), business valuations and business strategy support.

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