Having well-maintained and accurate books and records is a vital part of your business arsenal. Not only does it give you the information you need to improve your business, it can also keep you on the right side of the law.

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Let’s look at two very good reasons to stay on top of your business’ books and record-keeping…

 First, ‘the carrot’: Business benefits

Here are just some of the business benefits of keeping your books and records up to date:

  • You’ll have the financial data you need to operate more efficiently and increase your profitability
  • They’ll give you a complete picture of your business’ assets, liabilities, income and expenses. You can then use this information to compare your business with others in the same sector, and discover your strengths and weaknesses.
  • Good records are essential for preparing your end-of-year returns and financial statements, not to mention maintaining good relations with your bank.
  • They’ll make your accountant’s job a lot easier, which could mean lower accounting fees/costs.
  • You’ll be better placed to make informed decisions quickly.
  • You’ll be able to relax, knowing you’re fully compliant with your taxation and other legislative obligations.

As you can see, properly maintaining books and records plays a crucial role in a business’ success. Unfortunately, businesses often fail to keep them up to date, which can get them into trouble. And if the business goes bad, it can make things very difficult for those managing the fallout.

And then there’s ‘the stick’: Legislative Requirements

If ‘the carrot’ doesn’t motivate you, perhaps the ever-looming ‘stick’ does: The legal potential consequences. Failing to maintain proper books and records can prove restrictive, and may even constitute an offence under the Corporations Act 2001 or taxation legislation. And this can expose you to penalties from the Australian Securities and Investments Commission (ASIC) and/or the Australian Taxation Office (ATO).

Companies are legally required (by s286 of the Corporations Act 2001) to maintain written financial records that:

  • correctly record and explain its transactions, and financial position and performance
  • would enable true and fair financial statements to be prepared and audited.

And they need to retain those records for seven years after the transactions they cover have been completed.

Section 262A of the Income Tax Assessment Act 1936 also states that records must be retained for five years after they’ve been prepared, obtained, or the transactions completed (whichever occurs latest). And if there’s a specific tax matter (such as capital gains tax), they may need to be kept even longer.

You can store your financial records electronically, and numerous accounting software packages can help you do this. However, you must be able to convert them to hard copy in a reasonable timeframe and make them available to anyone who’s entitled to inspect them.

Both the ASIC and ATO websites have numerous guidelines on what records you must/should keep.

Liquidation and Voluntary Administration

So what happens to the books and records if your company is placed into liquidation or voluntary administration?

Once an administrator/liquidator is appointed, it’s common practice for them to ask the directors, bookkeepers and accountants for the company’s books and records, which they are entitled to under the Corporations Act 2001. The Act also states that:

  • A person is not entitled to retain possession of books and records of the company, or to claim or enforce a lien on such books against an administrator/liquidator
  • A person must not engage in any conduct that hinders or obstructs the administrator/liquidator from obtaining the company’s books and records.

The administrator/liquidator will then investigate the company’s books and records, and form a view as to whether or not they comply with s286(1) of the Corporations Act 2001. If they don’t comply, then the administrators/liquidators have an obligation to report to ASIC.

If a company with inadequately maintained books and records is placed into administration/liquidation, there are further risks such as:

  • The company being presumed insolvent in certain recovery actions taken by a liquidator against related parties
  • The directors of the company facing exposure to insolvent trading claims by a liquidator
  • The officers of the company possibly breaching their duty to exercise due care and diligence by failing to maintain proper records. This is an offence under the Corporations Act 2001, and could expose them to civil liability claims brought by the liquidator.

The carrot or the stick?

Regardless of whether you’re motivated by the carrot of having a better managed business, or the stick of potential legal consequences, it’s clear that maintaining proper books and records for your business is vital. It makes sense for your business to invest in professional bookkeeping, accounting and back-office support to ensure your records are always kept up-to-date and accurate.