The Lost Art of the Deficiency Account

Is it just me that suspects that the purpose of the deficiency account has been forgotten in the teaching of CPI, CI and the JIEB? I write this after another visit where the managers had passed JIEB since (say) 2001.  I am all for modernizing the profession, but it seems to me that as a consequence of a time-poor, check-list driven culture, the Deficiency Account is only now produced in order to tick the SIP 8 requirement for one. Beyond that, the D/A’s I see are often poorly constructed, if not plain wrong, and are not used properly anymore.

While I hope that the collective examiners might take note of this observation (confirmed by my other colleagues, incidentally) let me remind my readers of the reason why a deficiency account should be the starting point in any preliminary investigation, be it in a Liquidation or an Administration.

The main function of a deficiency account is to provide an estimate of the trading losses incurred since the last accounts. As helpful as that can be, it gets a lot more interesting when one also has figures available for gross turnover in the period. Immediately, one is able to compare the apparent performance of the company in the final period, with its confirmed performance in previous years.  If the level of the deficiency predicted by the turnover is significantly less than the level suggested by the statement of affairs, the three most likely explanations are –

  1. A significant fall in gross profits (suggesting that trading has been badly managed in the final period, a useful plank in a case for wrongful trading).
  2.  A significant rise in “overheads” (which might relate to directors’ drawings being booked as remuneration rather than loans).
  3. A significant undisclosed disposal of assets at undervalue.

Of course, these indications will still have to be confirmed by detailed enquiries later on, but the virtue of a well-structured deficiency account is that half an hour’s work by a properly trained administrator will give the IP plenty of ammunition with which to cross-examine the directors’ history.  As such, it can be done in the pre-appointment period, when directors are still available for questioning, rather than waiting until three months down the line, when they can find plenty of way’s of avoiding the enquiry.

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