When do you need rescue accounting?

Rescue accounting come into play from previous business decisions or mismanagement. Most early-stage companies and entrepreneurs hire external consultants to do administrative tasks around the office, including accounting. Companies of small sizes and bootstrapping entrepreneurs often opt for cheap solutions. Indeed, accounting simply falls to the bottom of their priority list.

Let’s find out more insights about rescue accounting in this guide below:

• Signs That Your Business Needs Financial Rescue
• Why is rescue accounting necessary?
• Fixing your accounting with Rescue Accounting

Signs That Your Business Needs Financial Rescue

Frequently, startups and even medium-sized companies can get away with making accounting a low priority for a surprisingly long time. Although some accounting mistakes, errors and missed reporting can start to pile up and negatively affect the business.

There is a long list of reasons why this happens:

• The company does not have a defined process to issue invoice and manage account receivables,
• There is no digitization of finances, or the accounting software used is not the right fit for the business activity,
• There is no reconciliation of account done in time,
• Small transactions with lower business impact are often ignored,
• Unclear communication with the accounting team… the list can go on forever.

If your company is falling within one or more of the above situations, it might be failing its accounting. The proper accounting reporting is mandatory in most countries in the world, including Singapore and Hong Kong.

Why is rescue accounting necessary?

The company files inaccurate Financial Reporting

Financial reporting refers to preparing the cash flow statement of the company, the Profit & Loss and the Balance sheet. Financial reports must be filed to the local revenue authority. Failing to file financial statements results in penalties imposed by the tax authority. Also, one of the main consequences of bad reporting is the difficulty of making good decisions.

Companies of all sizes rely on the accuracy of the internal reports to prepare budgets, forecasts and develop performance indicators. Reporting is crucial to identify red flags. Accounting errors do not always actually violate the accounting principles, but if sales metrics and marketing numbers are off, the projections and budgets may be misleading, too. If the reports understate a debt load, companies may discover deeper losses than previously anticipated.

Wasted time and resources

One of the main consequences of wrong accounting is wasted time. Founders and managers too often spend a significant amount of time on trying to fix their accounting. Identifying, reconciling and restoring financial reporting errors and dealing with the consequences is time consuming. It is frustrating for all the stakeholders involved and can lead to strained relationships. Most importantly, it distracts decision makers from running the business and dedicating time and energy to the company’s growth.

Companies subject to external audits that do not have internal controls in place face worse repercussions. While internal controls are meant to prevent errors and fraud, failing to implement them is damaging for the company. The time spent closing the audits is on average 5x to 10x longer for companies without internal controls than companies with good accounting practices. Which also leads to booming auditing fees.

Fines and Penalties

The Singapore Inland Revenue Authority (IRAS) imposes penalties when errors, omissions and discrepancies are found in the tax returns submitted by companies. Despite the actual intention to the declare a wrong amount, IRAS will apply the following penalties to company not complying:

Without intention to evade taxes

1. Penalty of up to 200% of the amount of tax undercharged;
2. Fine of up to $5,000; and/or
3. Imprisonment of up to three years

With intention to evade taxes

1. Penalty of up to 400% of the amount of tax undercharged;
2. Fine of up to $50,000; and/or
3. Imprisonment of up to five years

Late filing of accounting and financial statements in Singapore

Additionally, companies that are late or who don’t file tax returns are subject to penalties by the local tax authority. For defaulter companies, IRAS will issue an estimated Notice of Assessment (NoA) based on the company’s past years’ income estimating an increase in the taxable turnover and will require a composition amount up to $5,000 to avoid prosecution in court.

In Singapore, it is mandatory for most companies to file their financial statements with their Annual Return under Section 197 of the Companies Act (CA). Indeed, if the Annual Returns are lodged late, a penalty fee applies to companies as follows:

• If the length of default is within 3 months after the AR filing due date: SGD 300
• If the length of default is more 3 months after the AR filing due date: SGD 600

Late filing of accounting and financial statements in Hong Kong

In Hong Kong, for failure to notify chargeability to tax or failure to submit tax return in time, the Department will make reference to the following penalty loading scale:

First offence

• Case (i): 10% of the amount of tax undercharged.
• Case (ii): 20% of the amount of tax undercharged, if the return is filed after two or more estimated assessments are issued.

Second offence

• Case (i): 20% of the amount of tax undercharged
• Case (ii): 30% of the amount of tax undercharged, if the return is filed after two or more estimated assessments are issued.

Third or subsequent offences within 5 years

• Case (i): 35% of the amount of tax undercharged.
• Case (ii): 50% of the amount of tax undercharged, if the return is filed after two or more estimated assessments are issued.

Reputational damage

Some simple examples: exaggerated profits can lead to higher taxes, while underestimated profits make the company look less valuable. In both cases, the company suffers a loss of credibility and wrong financial reporting always undermines the credibility of the management.

Startups preparing for the next round of investments, entrepreneurs opening up the cap table for the first time and medium company seeking to partner with institutional investors frequently note wrong accounting as adverse impact on their ability to secure capital. Investors, shareholders and creditors loose trust in the C-level executives unable to present accurate financial data as they use a company’s financial reporting to evaluate its financial health and creditworthiness, and, at the same time, business owners lose negotiating leverage.

Fixing your accounting with Rescue Accounting

“Rescue Accounting” is the catchall term covering everything from rectifying the financial reporting of the company, investigating the errors and omissions in the accounts and making sense of the data currently in disarray, notifying the authorities of the correct data and restoring trust with the company’s stakeholders.

It essentially comprises of three main actions:

1. Immediate: ensure the invoices have been correctly sent to the clients, the bank account data is up-to-date, the imminent expenses are budgeted for and verification of the tax submissions.
2. Short-Term: everything from bank reconciliation to cleaning up the financial statements and updating the account receivables and payables.
3. Long Term: establishing efficient processing for quarterly reporting, payment collection, cash flow management, deadlines and easy to follow procedures.

MBiA – MyBusiness in Asia often onboards clients with a backlog of failed or faulty accounting. We help them with our Rescue accounting services and ensure of the full compliance of the reporting both internal and with local authorities.