September 2011

Information on the financial affairs of a business is important in many types of legal action.  Such situations include loss of earnings or loss of profits claims, and cases in which valuations are necessary, for example shareholder disputes and matrimonial settlements. Consideration of a business’s turnover and profits is often important in fraud cases and confiscation proceedings.

Documents Containing Financial Information

The table below categorises some of the main documents containing financial information according to their potential relevance to a business’s turnover, profitability and financial position.

  Documents primarily relevant to:
  Turnover Profitability Financial position
Detailed profit and loss account X X  
Balance sheet     X
Cash flow statement   X X
Register of charges     X
Management accounts X X X
Budgets, forecasts and business plans X X X
Minutes of board/partners’ meetings X X X
Working papers of accountants/auditors X X X
Order books X    
Sales invoices X    
Details of bank facilities     X
Bank statements X   X
Income/corporation tax returns X X X
VAT returns X X  
Correspondence with HM Revenue & Customs X X X
Returns to regulators (if applicable) X X X
Credit status reports     X
Correspondence with banks X X X

As the table shows, the information which is potentially available extends far beyond the profit and loss account and balance sheet.  Financial statements can often disclose a great deal of information, but a much more complete view of a business can be obtained if it is possible to gain access to information generated for internal or other purposes.

The table also shows that some types of information may be relevant to a business’s financial position as well as to its turnover and/or profitability.  For example, a review of a business’s balance sheet may indicate that its fixed assets have been largely written off: although profits are enhanced in the short term by low depreciation charges, the financial position and profitability of the business will be affected in the future by the need to fund replacement assets.

Purpose of Review

The information to be reviewed depends on the purpose for which it is required.  If a business is to be valued, for example, particular attention needs to be paid to budgets and forecasts, management accounts, sales data and order books to establish the level of future maintainable earnings on which the valuation is likely to be based.  By contrast, a review of a business’s financial position to establish the level of funds which can be made available as part of a divorce settlement focuses on such matters as the level of bank facilities.

Consistency of Information

Information from one source can act as a check on that from other sources.  Discrepancies between one set of documents and another may reveal a deteriorating financial position and/or poor management: for example, increased debtors in a period of static sales may indicate worsening credit control.  Inconsistencies may also indicate mis-statements in the recording of information.

Conclusions

The volume of information to be examined depends primarily upon the size of the business, on time and cost constraints and on the extent to which appropriate documents have been made available.  It is important, therefore, to concentrate attention on the most relevant information to achieve a focused and cost-effective review.

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