1 OFFICE PROCEDURES
1.1 Aims of this section
The section is intended to provide guidance on the general office procedures to be followed when undertaking all assignments.
In all professional work there are two main risks: the risk of an error being made; and the risk of that error being overlooked. The former is impossible to eliminate – errors will always be made – but the risk of such errors occurring can be reduced by standardising systems and procedures in line with current best practice.
Having accepted that errors will be made, procedures are needed to detect those errors and prevent them leaving our building, so reducing the risk of damage to reputations, loss of clients or claims against our firm.
1.2 Types of work
The risks inherent in an accountancy practice vary with the type of work undertaken. That type of work itself varies considerably, ranging from compliance work, through accounts production, to forecasting and decision making, which includes cash flow forecasts and management accounts. Certain types of work are specifically regulated either by Act of Parliament or ethical rules.
The contents of the financial statements for a company are governed by the legislation, such as the Companies Act, 1965 and also by various financial reporting standards issued by the Malaysian Accounting Standards Board. The directors of the company are responsible for the contents of the financial statements and for the necessary procedures to produce meaningful statements. In many cases, due to the small size of the company, the directors are unable to produce their own financial statements and, accordingly, the firm is appointed as accountants to prepare financial statements on the directors’ behalf. With the introduction of the Ethical Standards by the Malaysian Institute of Accountants, the ability of a firm to offer non-audit services to an audit client has become far more limited. The reality now is that whenever non-audit services are performed for an audit client, we will need to document consideration of our position as regards these ethical standards and detail why they think it is appropriate to continue with both the audit and, for example, the provision of corporation tax advice. In addition, documentation should state whether the firm is required to put safeguards in place to enable it to continue and, if so, what those safeguards are.
To ensure that this process works in all cases, it is imperative that firms have procedures in place to ensure that any non-audit services to be provided to an audit client are communicated to the SP; this applies to all clients, new or existing. The firm maintains a list of services provided to each client.
Where there is a proposal to provide non-audit services to an audit client, the SP will need to consider whether, in the light of the standards, auditor independence will be threatened, the extent of the threat, and whether there are safeguards available to eliminate the threat or reduce it to an acceptable level. If there are no available safeguards, or the threat to independence is too great, the firm will have to decide which service they wish to perform: the audit or the other service.
With existing clients, the situation is no different. Again, the SP must be aware of all non-audit services provided to audit clients to enable him to assess the firm’s position as regards its ability to perform the audit and/or the other services.
Appendix 1.1.1 Register Of Audit Client – Independence Threats
Irrespective of whether an audit is to be performed or not, the firm must also comply with the Ethical Guidance on objectivity and independence. An assignment acceptance form is to be completed before work on each assignment starts, on each occasion to ensure that there are no matters that will impinge on the firm’s ability to perform the work, whether due to interaction with audit services or other independence or ethical issues.
A1.1.2 Accounts Preparation Assignment Acceptance and Continuance Form
A1.1.3 Audit Assignment Acceptance and Continuance Form
It is clearly highly inefficient to prepare the accounts of a company without consideration of the audit or reporting implications. Although many practices may prepare the accounts before auditing them, it is generally appropriate to prepare those accounts under the auspices of an audit which is to follow later on.
Our firm may be requested to prepare financial statements for clubs or charities, which may also require an audit or an independent review. The appropriate duties should again be spelt out in a letter of engagement and the wording of any report should clearly state the nature of the work carried out. As for audited companies, the production of accounts in a prescribed format and their audit or review is desired.
1.3 Engagement of a client
1.3.1 Terms
A formal letter setting out the terms of engagement is now mandatory in respect of all professional work in order to ensure that all parties are aware of exactly who is to do what and where the responsibilities lie so that disputes are less likely to arise and are easier to settle if they do.
A2.2.1 Sample Letters L5 Engagement Letter (Statutory Audit).xlsx
A1.2 Engagement letter sole trader.doc
A1.7 Engagement letter – bookkeeping services.doc
A1.12 Engagement letter partnership.doc
Engagement letters are, therefore, required for all clients. The greatest risk of a dispute is where the figures in question are a forecast rather than a historical record, such as in cash flow forecasts and business plans, since these figures have been drawn up with the express intention of them being relied upon in a decision making process. It is ironic that this is the area where engagement letters are generally least common.
Suggested wording for a standardised sole trader engagement letter can be found in the specimen documentation at A1.2. The standard letter envisages the use of a number of negative clauses, clearly stating what the practice will not do for the client as well as what it will. It is important to ensure that, where agreement has been made that the client will carry out such duties himself, this fact is recorded in writing so that if a penalty results in this area, the client will have no grounds to shift the blame on to us.
Clearly, where the nature of the engagement changes, the engagement letter itself will also need to be updated. This is important and will have implications for the whole relationship. For example, where an engagement letter clearly states that Service Tax returns are not being prepared by us, but in fact they are, the validity of the rest of that engagement letter would be cast into doubt.
The use of engagement letters on a general basis is unpopular and frequently face resistance by clients. This is indeed the case where mass-mailings are carried out on a periodic basis. Wherever possible, this should be avoided by the inclusion of a review of the engagement letter at the completion of each cycle of a client’s affairs. Where engagement terms have changed, a new engagement letter could be produced at the same time as the final accounts in the case of an accounts production assignment, or the tax return in the event of a tax compliance assignment. The client is far less likely to resist the signing of such a document when he is already expecting to sign a number of other documents. Engagement letters should always be obtained at the outset of an engagement but this should not be a problem since the client is normally in a positive frame of mind and is eager to get the formalities over with in order to obtain the service.
A copy of the engagement letter should be signed by the client and returned to us as positive evidence of the client’s approval of the terms.
Where there is more than one firm acting for a client, it is very important that precise terms of reference are agreed. This may occur where one firm is instructed to undertake some special work whilst the other firm carries out the routine compliance work. The new firm should notify the other accountant unless the client gives a valid reason for not doing this.
When dealing with a partnership, the specimen engagement letter at A1.12 should be used and the letter addressed to the tax return nominated partner. Where we carries out bookkeeping work then a specimen engagement letter is included at A1.7. Frequently such work is carried out along with Tax return preparation and/or the provision of management accounts. Where this is the case then the letter can be adapted by including the relevant sections from other letters, or separate letters can be issued depending on the firm’s preferences.
Disengagement letters
A1.13 Disengagement letter.doc
Whilst we are mainly considering the acceptance and commencement of an engagement at this stage, we should also consider appropriate procedures at the termination of a working arrangement. Best practice dictates that a disengagement letter should be sent to the client establishing who has responsibility for what and the cut off on particular aspects of work previously performed. Such a letter would avoid misunderstandings over the completion and handover of work and minimise the threat of legal action by a disgruntled ex-client when, for example, a Tax return filing deadline is missed.
Any such letter should refer to the matters that have been dealt with for the client and what elements are yet to be completed. The letter should detail who is responsible for the completion of this work, i.e. our firm or any incoming accountant/firm, and give a timescale for its completion. It is also advisable to give an indication of any outstanding fees to be billed and the cost of the additional work to completion. An example disengagement letter is shown in A1.13.
1.3.2 New client packages
A1.3 New client checklist.doc
A14.3a Identification – individuals.dot
A1.2 Engagement letter sole trader.doc
A1.7 Engagement letter – bookkeeping services.doc
A1.12 Engagement letter partnership.doc
A2.2.1 Sample Letters L5 Engagement Letter (Statutory Audit).xlsx
A2.2.2 Sample Letters L9 Letter of Authority From Client To Third Party For Realease of Information To Auditors.xlsx
There are a number of procedures that a firm needs to go through when taking on a new client. It is common for firms to put together a ‘new client pack’ of forms and information likely to be needed at the initial interview. Typically this might include:
• new client set-up form; (A1.3)
• Anti-Money Laundering ID checklist;
• engagement letter;
• letters of authority to supply information – addressed to the bank etc. and signed by the client;
• Change of professional letters (usually initiated by Company Secretary).
1.3.3 Other considerations
When a new client is taken on, consider the practice’s ability to serve the needs of that client. Such consideration splits into two main areas: independence and ability.
When the client’s or the practice’s circumstances change, consideration should be given to whether the practice is sufficiently independent to enable it to service that client’s needs properly. Detailed guidance as to likely threats to objectivity is given in The Code of Ethics and Conduct, on Integrity, Objectivity and Independence.
As noted at section 1.2 above (types of work and the interaction with audit services), special consideration will need to be given when taking on a new client where audit and other services are required. Similarly, if the services of an existing audit client are to be extended, these will need to be reviewed in the light of the Ethical Standards. Conversely, if a non-audit client is moving into audit, this will require the same detailed consideration.
The firm should also consider whether it has the resources and experience to deal with that particular client’s future needs.
1.3.4 One-off assignments
A1.14 Assignment acceptance form.doc
A1.15 Consultancy project assignment planning form.doc
A1.16 Consultancy assignment completion questionnaire.doc
The firm may be instructed to undertake non-recurring work, but before accepting the appointment the practice should consider whether the nature of the work is such that it can be adequately dealt with within the firm’s present technical ability. The risks associated with the project should also be considered.
• Will the firm be exposed financially?
• Is the PII cover adequate?
• Can the firm work within the likely time-scales?
• Is the firm happy to sign any report required in the format prescribed?
If the one-off work is relatively new to the practice then the cost of gearing up for it is likely to be prohibitive unless premium charge-out rates can be obtained or it is likely to be the first of many such assignments – a new niche in the market for the firm to enter.
The risks of the work should also be considered in relation to the amount to be charged. If the risk is high then the amount charged should be high, again calling for premium charge-out rates.
When carrying out one-off consultancy projects then the assignment acceptance form (A1.14) should still be completed. In addition a project assignment planning form (A1.15) and a project completion questionnaire (A1.16) are provided to provide some structure to the work.
1.3.5 Subcontracting
A15.6 Subcontractor agreement.doc
In some cases when we are acting as subcontractor of another firm or vice versa, it is important to be clear about who is taking responsibility for the client service. Both us and the other firm need to recognise that there is a duty of care to each other and potentially others, particularly the client. Matters such as conflicts of interest and other independence factors as well as client confidentiality and the technical requirements should be considered when accepting any subcontract work.
There is a specimen subcontractor agreement at A15.6.
1.4 Working practices
1.4.1 Staff
A1.20 Statement of independence and confidentiality (non-audit).doc
It is essential that appropriate staff be used for all assignments. The first stage in ensuring that staff are appropriate to the job is to ensure that they are trustworthy and are aware of the legal and ethical constraints upon them.
Fit and proper declarations, insider dealing statements, confidentiality statements and independence statements are all used to a greater or lesser degree within the regulated areas such as auditing. However, these statements have relevance to almost every aspect of a firm’s work; it is therefore strongly recommended that all staff, including administrative staff, the office junior, sub-contractors and consultants, be required to complete and return such statements and declarations at least on an annual basis.
The statement of independence, confidentiality and fit and proper status for non-audit staff can be found at A1.20.
As mentioned above, for the purposes of quality control, sub-contractors and consultants should be treated in exactly the same way as any other members of staff.
It is also important that all staff, including sub-contractors and consultants, have up to date contracts of employment or agreements. These contracts and agreements should include a clear statement that the individual should at all times operate within the Code of Ethics and that failure to do so is a disciplinary matter. This brings the matters in the fit and proper form etc. within the contract of employment and ensures that the practice has the appropriate sanction available in the event of a gross breach of the ethical guide.
1.4.2 Filing
It may appear trivial to include filing as an essential office procedure, but it is not uncommon for the filing to be treated as the most menial of the tasks to be carried out within the office.
Clearly, filing is not a directly productive process, and it would not appear desirable for staff to spend chargeable time on such a matter. However, if filing is not being conducted properly, chargeable time will be wasted, either in searching for something that has been inappropriately filed or by acting in ignorance due to the absence of an appropriate document from its proper place, resulting in an error being made which itself requires rectification. The latter situation can ultimately result in a claim against the practice. Filing, therefore, must be taken seriously.
The following types of files are commonly maintained for small/medium sized practices:
• correspondence file;
• working file – audit/accounts;
• permanent file; and
• tax file.
Nowadays, the permanent and tax files are frequently combined for non-audit clients. Such a file may include the following, or they may be filed in separate files:
• company secretarial;
• signed accounts;
• billing information;
• background details; and
• money laundering identity and address verification.
For some clients you may also require:
• payroll file;
• service tax file; and
• cash flows/management accounts file.
Since it is clearly essential that the filing be carried out correctly with the minimum of effort, possibly by young, inexperienced or new staff, it must be kept as simple as possible and the files must be clearly identifiable. Colour-coding is often useful both for the files themselves and types of correspondence within those files e.g. bills in blue, letters to HMRC in yellow etc.
Files should clearly identify the client’s name and reference and the type of file, even if they are colour-coded.
Ring files are more efficient than treasury tags, since you can file information anywhere without having to remove all the contents. ‘Jiffex’ files are more secure than ring files since the latter tend to come apart if dropped. Files with a blade filing system are cheap, but filing clerks loathe them and will tend to put everything on the front!
It is essential to ensure that the person carrying out the filing understands the system; to this end it is also very important that there be a standard system throughout the office. If principals have different systems at present then they should get together and come up with a common system.
Duplication of documents on file is a waste of time and paper. It should be clear what goes on which file and to this end it is useful to record the other files open for that particular client on the inside cover of each file.
It should also be made a hard and fast rule that certain files, such as correspondence and tax files, are returned to the cabinets immediately and that papers are not kept loose in the front of any file. If files do tend to go missing, each principal and member of staff could be issued with cards with their name on. If they remove a file, they must then insert their card into its sling or section. They are then responsible for that file and other people know where it can be found. Files should be held securely so that confidentiality can be maintained.
Electronic filing/document management systems are becoming more common. These carry the advantages of being environmentally friendly as well as allowing quicker retrieval of documents. For instance, a client may call regarding a matter and rather than having to arrange to call back while you go and get the files, previous correspondence can be reviewed onscreen while staying on the phone with the client. Such systems also carry less risk of file or document loss. The practice should ensure that it has robust procedures in place for the scanning of incoming and outgoing post as well as storing emails, working papers, meeting notes and other correspondence.
1.4.3 Referencing
As the practice gets larger, a great deal of time can be spent trying to work out who is responsible for what and when. A carefully thought-out referencing system can be a great help.
As the number of clients increases, referring to the client by name becomes less practicable. Some sort of coding becomes necessary and the most effective of such codes is usually alphanumeric where the first letter of the client’s surname forms the first letter of the reference, then the clients are numbered in whatever order suits. However, any system that works for you is acceptable provided that there is a quick and easy indexing system in operation to enable staff to find both the code number for a particular client and the client for a particular code number.
With self assessment requiring agents to distinguish between partners and their partnership, as well as directors from their company, the alphanumeric approach becomes more flexible enabling letters to be used as a suffix to distinguish between sub-clients in a client group. So B12 could be a partnership with B12a and B12b being the individual partners’ tax files.
Correspondence
Correspondence should contain a reference to enable a person knowing the code to determine:
• the office (if more than one);
• the client;
• the principal responsible; and
• the individual writing the letter (if not the principal).
The reference may also include a reference to the typist and an indication of the file or section in which the letter is to be filed.
In these days of PCs, it may also be worth having some way of identifying the particular computer file in which the letter can be found. Rather than incorporating this into the reference, a document footer could be set up in an extremely small typeface which records the full document file name. Modern laser printers can print extremely small, so such a reference could be legible whilst not at all intrusive.
Example 1.1 AN EXAMPLE REFERENCING SYSTEM
PJ/A001/ KC Lim
This decodes as follows:
PJ Kuala Lumpur Office
A001 Client A001 Bloggs & Co (‘a’ indicates Mr Bloggs’ personal tax)
Lim Staff’s initials KC Lim
Other filing
Other documents, apart from correspondence, originating from the firm could also carry such a reference but documents coming into the practice to go on to the filing system will not. Such documents could be stamped with a grid containing the various files so that, for example, an incoming payment on account notification would have the grid stamped on the back and the tax box ticked.
Alternatively, simply write a note on the top right hand corner of the document! It takes no time at all and cuts down the risk of a misfiling.
A lot of correspondence these days is conducted via e-mail. As with any other form of communication, a record should be kept on file, accessible to all those that might need it. It is generally advisable to print a hard copy of an e-mail and place it on the correspondence or appropriate file. If it is left on computer alone, not only do you need to ensure that all relevant staff are aware of its existence and have access to it, but you also need to ensure that you have adequate back-up procedures in case of problems. However, a properly constructed and controlled networked computerised central record for each client can operate very efficiently and effectively.
1.4.4 Reminder systems
In any practice, one of the key risks is forgetting to do something within a set time limit. Such a risk is greatest in taxation but it is not exclusively so.
Computerised reminders can be set up to run through, say, Microsoft Outlook, or through a networked system, but considerable care is needed to ensure that adequate back-ups are made – a computer crash could result in loss of all the reminders with potentially catastrophic results. In addition, some control is required to ensure that the reminders are acted upon, and not deleted or continually deferred to the following day, week or month.
Two types of manual reminder systems can be implemented and whilst they can be combined, the differences between the two are important.
Forward
Sometimes you need to be prompted to do something in, say, two weeks’ time or possibly two years’ time. For example, you may have written to a client requesting information and it would be useful to be able to remind them that you are still waiting for this information, particularly when the use of that information is time-critical. More frequently, a tax election may need to be considered or reviewed before a set deadline. A forward reminder system allows you to place a note in a central system that will arrive back on your desk (or on someone else’s) as a reminder at a suitable later date.
Ideally, such a reminder system should be under the control of one person centrally, with appropriate cover for holidays and illness.
A simple manual approach to such a reminder system could operate as follows:
A filing cabinet could contain 53 slings numbered week 1, week 2 etc. up to week 53. An extra sling should be included for each of the next three years. Alternatively, an expanding work file or lever arch file with dividers could be used.
Each year, a schedule should be typed up and circulated to all staff matching week numbers to set dates, or tax weeks or week numbers in a diary, could be used. If you wish to be reminded to take some action at a later date, a copy of any correspondence or document relevant to the matter, possibly with an explanatory note, should be placed in the relevant week’s sling identifying to whom it is to be returned.
Alternatively, such documents could be passed to the centrally responsible individual with a forward reminder form (see A1.8).
The person responsible for the reminder system would review the file every Monday morning and pass such items back to the individual member of staff at the appropriate time.
For security of information, each item should go in the system in a separate plastic envelope so preventing mixing up the documents within each week.
At the end of each year, the reminders in the next year’s sling should be sorted and filed in the appropriate week 1 to 53.
There are a number of computerised personal information managers (PIMs) available which can do the above job; indeed most tax software comes complete with a tax diary/reminder system which could well be expanded to include any practice matter on hold. Clearly, there is a great deal of merit in incorporating the Companies House filing dates, bank letters, etc. into such a system for corporate clients.
Perpetual
This is designed to issue regular reminders until it is requested that they be cancelled. You can decide the regularity, whether monthly, quarterly, annually etc.
The system requires a reminders file to be issued to one member of staff, who is then responsible for it. The specimen documentation includes at A1.9 an input form which is passed to this person, who then issues a reminder at the specified intervals.
1.4.5 Working papers
The overall requirement of working papers on an accounting assignment is to provide a clear trail, following the figures from the basic input to the final product. Furthermore, the files should identify the sources of the information received and any confirmation work that has been carried out. The objective is to produce a meaningful set of accounts or tax return and the file must support such documents.
The working papers should be presented in such a way that they are easy to review, and so that, in the event of any future dispute, the precise work undertaken could be repeated if necessary.
All schedules should be adequately headed up including the client’s name, the accounting period and a reference. This should also include the initials of the member of staff who prepared the schedule and the date on which it was prepared, the initials of the reviewer and the date of that review.
All supporting schedules should agree to the lead schedule and the lead schedule should agree to the final document.
If any ticks or codes are in use to indicate work practices, that code should either be a standard in use within the practice or a key should be indicated on the schedule. Staff bringing their own ticks with them from other practices must be required to adapt to the firm’s own practice and deviation from the firm’s standard must be clearly indicated. Otherwise, it is highly unlikely that anyone will understand what is meant in 10 years’ time!
1.4.6 Attendance notes
Increasingly, more advice is given by telephone than on paper. It is essential that all staff get into the habit of making attendance notes wherever anything of any relevance is said by either party in a telephone conversation or a face-to-face meeting. Staff should be continually aware that the information in their head is of little value to the practice. Furthermore, contemporaneous notes, no matter how roughly drafted, carry far more weight in a dispute than a verbal recollection of previous conversations. It is highly unlikely that the client will have made notes and so, if neither party has done so, it is a matter of your word against theirs. On the other hand, if you have a written note then the case is almost won.
Such notes are also essential where consultation takes place. If a matter is serious enough to require consultation, either with another principal or with an outsider, then the reasons for the decisions arrived at must be put down on paper. In the case of an outsider, it will also give you the opportunity of either joining them in a dispute or shifting the dispute onto their shoulders alone!
The file note should include all the essential points raised during a meeting, including:
• the date and time of the meeting or telephone call;
• the people present, or spoken to;
• the key facts discussed including any necessary background information; and
• any advice given.
The note of advice must record any caveats – clients frequently remember and act on the main advice without listening to the conditions and warnings attached to that advice.
On a networked computer system within the office. Records of telephone conversations and meeting notes could be entered on a computerised central record for each client, making them accessible to all interested staff. Again procedures would need to be put in place to ensure that records are updated as contact occurs.
Documents could be password protected to limit the staff who are authorised to update the records, with data available on a read only basis for other staff.
It is important that staff members are fully aware of the firm’s procedures when it comes to giving advice to the client. A specimen client advice policy is included at A1.23, which can be tailored to suit the specific circumstances of the firm.
1.4.7 Review
All papers not prepared by the SP must be reviewed and should carry the initials of the reviewer and the date of that review. The SP will not need to review the work of the most junior staff, as long as that work has been reviewed by someone more senior. That senior’s review must be evidenced. This can result in a review cascade or pyramid, with staff each reviewing the work of their subordinate and passing their own work upwards for review, so reducing the amount of original, and time consuming, work being carried out by more senior staff and maximising efficiency.
Where queries have been raised or points detailed which are likely to result in a comment, staff should be encouraged to write those points across just half the width of the page, leaving clear space for a legible and unambiguous clearance of the point. Many very valid points are raised only for the review points to be written so scruffily at the margin as to be illegible and therefore of no value.
Certain matters are recurring problems, and many procedures need to be followed on every job. Completion questionnaires can assist in this process and examples can be found in each relevant section.
1.4.8 Billing
As well as defining the work that will be done by way of an engagement letter, detailed billing provides evidence of what was done and can remove a lot of scope for misunderstanding. If the client is used to detailed bills, the assertion that if they were not billed then the work was not done can defend the practice if the client claims that a default is the responsibility of the firm. It is also easier to justify a fee if the bill is a long one!
Although the work done should be described in detail, when billing on a time basis you should not be tempted to price each item individually since this can result in the client arguing over aspects of the charges and negotiating a reduction. A global figure is far harder to attack.
However, where value pricing, a detailed breakdown is necessary, as the fee will have been agreed in advance on the basis of what may almost be a price list.
1.4.9 Record retention
The practice’s approach to the retention of records is likely at some point to become contentious. Storing paper is expensive and the amount of paper being produced seems to expand by the year.
The practice must distinguish between papers that are prepared for the client by us and those that are prepared by us for our own use. Where the information belongs to a client then it would be best practice to offer to return it before destroying it.
If there is any doubt over ownership of a document than you may need to seek legal advice. Generally we consider three main criteria in determining who documents and records belong to. Firstly we should look at the contract we have with our clients. This would usually be evidenced in an engagement letter, but essentially any specific agreement made between us and the client will override any other considerations.
Secondly, we should consider the capacity in which we act in relation to our clients. We may be acting as a principal or an agent depending on the work we have been engaged to carry out. To give examples, we would be acting as an agent if instructed to negotiate our client’s tax liabilities with the Inland Revenue Board, but as a principal where we are auditors.
Where we act as a principal then the documents we created usually belong to us. Where we are acting as an agent then the documents created belong to the client.
Thirdly a member should consider the purpose for which the documents and records exist or are created. Accounts working papers for a sole trader or a partnership are now quite clearly tax documents and as such must be retained for six years from the end of the tax year in which the relevant accounting period is assessable.
This six-year record-keeping requirement has always been the case for Income Tax but the tax requirement effectively extends it by more than a year in many cases.
For professional indemnity insurance purposes, the record-keeping requirement is stronger still, since a matter does not finally escape the reach of a civil case until fifteen years have passed from the negligent act. Even then, recent cases have suggested a movement towards an open-ended liability period. The maxim must now be, if in doubt, retain – indefinitely! Some professional indemnity insurers now include a retention clause on the policy and failure to observe this may invalidate your cover.
Many practices have a policy of retaining all their existing clients’ records and disposing of the records of clients who have left more than six years ago. As already noted, an offer should be made to return information belonging to a client or former client before destroying it. Clearly, care also needs to be taken to ensure that this requirement falls within the requirement for tax records to be maintained but one must also consider the professional indemnity insurance position. Indeed, it can be argued that the clients who have left are those who are more likely to claim since another accountant will be looking into their affairs quite closely.
It would clearly not be possible to maintain fifteen years or more of records in the filing cabinets; at the very least an archiving system is required. However, it is essential to ensure that crucial documents are not archived; the documents archived should just be those items which are unlikely to be referred to and will only be missed in the direst of circumstances.
Correspondence files
Such a file would normally be in strict chronological order and would normally be archived immediately upon its replacement when it is full. It is therefore essential that documents such as signed engagement letters and signed accounts are not filed on the correspondence file.
Accounts files
Accounts working papers can normally be archived after two years so that at any one time the current and the previous working file is easily available. One would normally have one such file open per year unless the client is particularly small.
Permanent/tax files
These would not normally be easy to thin but it is generally signed accounts and signed returns which add to the bulk of such files. Once a tax return and its associated accounts are beyond the date at which Inland Revenue Board can open an audit (normally six year after the due date for filing) then they could be removed from the file and placed into storage.
Service Tax
These files would normally be completed in Service Tax return order with one section per return. They are therefore easy to thin, possibly taking the returns relating to the current and previous accounting periods from the front of the file and archiving the remainder.
The above deals with archiving; destruction is a further step. Destruction of a file should only take place with the approval of the SP and after the file has been reviewed to ensure that any vital documents are extracted.
Document retention policy
The SP’s policy dictates the number of years for which retention will apply for each of the following types of files:
• Permanent files (10 years)
• Tax files (7 years)
• Financial statements and reports (7 years)
• Annual or periodic working papers (7 years)
• Correspondences (7 years)
An accessible, permanent record of all files stored off-site will be maintained, and each storage container will be appropriately labelled for easy identification and retrieval. The partner responsible for office administration shall approve any destruction of files and keep permanent records of all materials destroyed.
An appropriate approval form for archiving and/or destruction can be found at A1.11.
1.4.10 Correspondence
Generally, any item in which an opinion is expressed should come from the SP, or appear to do so. Junior staff should only be permitted to write in connection with routine or administrative matters.
The SP must be made aware of any letter written in his name, even where it is signed per pro. For control purposes, the SP/Manager must review all outgoing correspondences and that review must be evidenced by the SP/Manager initialed on the file copy as evidence of review. This at least shows the SP/Manager is aware, and has shown himself to be aware, of the contents.
The specimen letters in the manual are written in the first person plural (i.e. from the firm) in the case of official matters, and in the first person singular (i.e. from an individual) when addressed to the client, apart from letters of engagement. It is anticipated that, in most cases, these letters will be written in the principal’s name.
A specimen client advice policy is included at A1.23.
1.5 Insurance
Professional indemnity insurance is not only a back-stop position should all the above controls fail but is also a requirement for Chartered Accountants in practice
Firstly, the firm’s cover should only be obtained from a reputable insurer. Our firm is required to provide proof of cover to MIA.
The SP is responsible in respect of getting sufficient insurance coverage.