The Vanishing Invoice Trail at a Growing Consultancy
You keep the books for Halvard Consulting, a four-person firm turning over about £620,000. The owner, Priya, does her own invoicing in a spreadsheet and sends you a monthly export. You have noticed that the export total no longer reconciles to the bank receipts: in March, bank receipts were £71,400 but the invoice export showed £58,900. Priya says the difference is 'a couple of old invoices she re-sent'. Separately, the purchase ledger includes £9,800 paid to a supplier with no invoice on file, described only as 'consultant - see Priya'. Two customer payments in February arrived from a company that is not the invoiced customer, and Priya asked you to allocate them against the oldest outstanding balances. She has also asked you to stop sending her the aged debtors report because 'it's confusing'.
1. Assess the reconciliation gap and the missing purchase invoice. What should you do before posting anything further?
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Start with what the records can prove. A £12,500 gap between bank receipts and the sales ledger is not a rounding issue at this turnover - it is 20% of the month's receipts, and 're-sent old invoices' does not explain it, because re-sent invoices would already be in the ledger or would appear as duplicates, not as cash with no corresponding sale. There are three candidate explanations, and each has a different accounting treatment: (a) sales that were never invoiced, meaning understated revenue and VAT; (b) receipts against invoices recorded in a different period, meaning a timing error; (c) receipts that are not sales at all - a loan, a capital contribution, or third-party money passing through. You cannot post a plug to suspense and move on; that is how a small gap becomes an unexplained balance that no one can reconstruct a year later.
On the £9,800: a purchase with no invoice, a vague description, and a named director is a documentation failure and a potential benefit-in-kind or director's loan issue depending on what it actually was. You should not post it to consultancy expenses on trust. Request the invoice or, if none exists, the contract and evidence of what was delivered; if it was a payment to or for Priya, it may need to be treated as drawings or a director's loan, with the tax consequences that follow.
Before posting further: raise a written query listing each unreconciled item, ask for the underlying documents, and record that you have done so. Do not adjust the ledger to make the bank agree. If Priya cannot or will not substantiate the items, you should consider whether you can continue to act, and document the reasoning either way.
2. Priya asks you to allocate third-party payments against the oldest balances and to stop receiving the aged debtors report. How do you handle both requests?
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Treat them as two separate integrity issues that happen to arrive together.
Third-party receipts: allocating a payment from Company B against Company A's oldest invoice is only correct if there is a documented reason - a group company settling on behalf of another, a novation, or an explicit instruction from the customer. Absent that, posting it against the oldest balance disguises the fact that you do not know who paid or why. The oldest-balance approach is also the one most likely to conceal a problem, because it clears the debts that would otherwise attract attention. The right step is to hold the receipts in an unallocated cash account, ask for the remitter's identity and the invoices they intend to settle, and get written confirmation from the invoiced customer that the third party is paying on its behalf. If that confirmation does not come, the receipts stay unallocated and the query stays open.
Suppressing the aged debtors report: this is the more serious request, because it removes your ability to see the ledger at all. An aged debtors report is a basic control, not a courtesy. If Priya finds it confusing, the answer is to explain it or simplify its format, not to stop producing it. You should continue to prepare it, keep your own copy, and record in writing that you advised against discontinuing it and why. If the request is repeated or escalated, it becomes a matter to raise with whoever oversees the engagement - and, depending on your role and the firm's structure, potentially a matter to consider under your professional body's guidance on integrity and on acting for clients whose instructions you cannot follow.