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Professional ethics: Disclosing unlawful benefits

Posted by Rick Yvanovich on

Case study

FC is a CIMA member and has worked in the finance department of a medium-sized UK wholesaler for just under a year. A colleague has informed him that the head of sales has been unlawfully declaring fuel benefits. The value of the benefits is relatively high for the size of company, which is not in great financial shape. This has resulted in a National Insurance (NI) Contributions bill that would probably be large enough to push the company into insolvency. He is in a dilemma.

Disclosing the NI bill might mean the company ceases trading with obvious repercussions. But FC feels that he has a duty to report this to HM Revenue and Customs. He has spoken to the company directors and made them aware that there is a large bill, but they have refused to disclose it. What would you do if you were FC?

CIMA’s advice

Not disclosing the NI bill is dishonest, and goes against the fundamental principle of integrity in CIMA’s Code of Ethics. As a professional management accountant and a CIMA member, FC has a duty to be truthful and straightforward.

business ethics cima

If the company is so close to insolvency that the NI contributions owed on the fuel benefits could tip it over the edge, this could be a case of wrongful trading. FC has discussed the outstanding bill with the directors, so they are aware that there is an amount owing that could render the company insolvent. If the company goes into liquidation in the future and it is shown that the directors should have been aware that the company was not reasonably expected to avoid insolvency, then they could be held liable for losses.

If FC does not make absolutely clear the possible implications of this for the company’s finances, then the directors may not be aware that the company risks going insolvent. Even though FC is not a legal director, if the company became insolvent he could be liable. As a professional management accountant he is expected to have a higher level of knowledge and skill than other employees.

FC needs to consider all the potential implications for himself and the board of directors, as well as the consequences of insolvency for the rest of the employees. Although FC has discussed the bill with the directors, he should go back to them to ensure they understand the implications and to explain the potential consequences to them, as directors, of inaction. It is important that FC records these conversations so that he can defend his position if the company did go into liquidation. It is also advisable for him to get legal advice about his own potential liabilities, for example from CIMA’s legal advice line, see below.

FC was advised to seek the advice of an expert, such as a Licensed Insolvency Practitioner (LIP). While it can be difficult to persuade a board to call in an LIP, they can be reassured by reminding them of the LIP’s duty of confidentiality to their client.

What FC did next

FC checked his facts and wrote to the board setting out the situation. He included details of the estimated size of the NI contributions bill and the potential implications of this bill on the solvency of the company. He sought legal advice for himself concerning his liabilities and made clear to the board the possible consequences of their inaction, whether the company became insolvent or not.

Once they were aware of the potential seriousness of the situation and that they personally could be implicated, the board decided to disclose the bill. They were aware that this would have a significant impact on the company’s financial standing. Knowing this, they were able to make decisions that meant the company remained solvent and was able to continue trading.

Source: Compiled from CIMA


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 Rick Yvanovich
 /Founder & CEO/

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