Your Company's 2006 Annual Audit?

[junkofdavid2]

Hi!

It's the beginning of a new year, and just as last year, it's time to begin your 2006 Annual Audit, to be submitted to the Revenue Dept by May.

I would like to open this forum to voice your common problems, and to see how others who had the same were able to solve it.

Here are some which I'll begin with:

How serious is it if the balances and transactions don't tally exactly with your earnings and expenses? (This is a Ltd. Co.)

Example 1: During times that company was losing money, bosses would simply "deposit" money into the company's account so that the company would have enough cash to meet it's obligations. No, there was no proper documentation of this in the form of "Capital Infusion" or anything like that. Just the deposit slip and/or an incoming remittance from home country. Therefore, there was money coming "into" the company and can be seen on the bank statement, but since it wasn't due to a sale, there isn't any receipt issued by my company to back it up.

Example 2: Office rental is 30,000 a month. The Thai landlord only gives receipt for 20,000 as is his policy with all the other tenants in the building. Therefore, company has an expense receipt for 20,000, but the bank statement will show a deduction of 30,000

Actually, we had the same scenario last year and we had no problems with the Auditor signing and filing the Annual Audit (I wonder if he even really went thru all docs, or just signed the Audit for the money!).

However, we have a new accountant and auditor this year (as the old accountant was "bad" in other ways) and I'm wondering if our new accountant and auditor would have a problem with this.

Is this type of problem common here in Thailand? Is it considered serious by many Auditors (was my last auditor simply a "fluke"? Or do they really not care so much?).

Let us know if you've been thru this, and how you resolved it.

Or, let us know what other Annual Audit problems you may have had (or have now) so that other posters may respond.

Cheers.

Edited February 26, 2007 by junkofdavid2

[bkkmadness]

Example 2: Office rental is 30,000 a month. The Thai landlord only gives receipt for 20,000 as is his policy with all the other tenants in the building. Therefore, company has an expense receipt for 20,000, but the bank statement will show a deduction of 30,000

If I thought it would cause me problems I would demand a full receipt for office expenses. If he wants to make himself another lower receipt so he can cook his books that's his business, but you should have a full receipt for your payments to him so you can keep your business in order.

[stoneman]

Is this type of problem common here in Thailand? Is it considered serious by many Auditors (was my last auditor simply a "fluke"? Or do they really not care so much?).

Let us know if you've been thru this, and how you resolved it.

Or, let us know what other Annual Audit problems you may have had (or have now) so that other posters may respond.

Cheers.

I own an Amity company and we keep very strict books because the Thai revenue dept does a much more thorough review of the Annual Audit for Amity companies. We account for every baht. We do not want any problems with the tax officials..

Stoneman

[soundman]

Hi!

It's the beginning of a new year, and just as last year, it's time to begin your 2006 Annual Audit, to be submitted to the Revenue Dept by May.

I would like to open this forum to voice your common problems, and to see how others who had the same were able to solve it.

Here are some which I'll begin with:

How serious is it if the balances and transactions don't tally exactly with your earnings and expenses? (This is a Ltd. Co.)

Example 1: During times that company was losing money, bosses would simply "deposit" money into the company's account so that the company would have enough cash to meet it's obligations. No, there was no proper documentation of this in the form of "Capital Infusion" or anything like that. Just the deposit slip and/or an incoming remittance from home country. Therefore, there was money coming "into" the company and can be seen on the bank statement, but since it wasn't due to a sale, there isn't any receipt issued by my company to back it up.

Example 2: Office rental is 30,000 a month. The Thai landlord only gives receipt for 20,000 as is his policy with all the other tenants in the building. Therefore, company has an expense receipt for 20,000, but the bank statement will show a deduction of 30,000

Actually, we had the same scenario last year and we had no problems with the Auditor signing and filing the Annual Audit (I wonder if he even really went thru all docs, or just signed the Audit for the money!).

However, we have a new accountant and auditor this year (as the old accountant was "bad" in other ways) and I'm wondering if our new accountant and auditor would have a problem with this.

Is this type of problem common here in Thailand? Is it considered serious by many Auditors (was my last auditor simply a "fluke"? Or do they really not care so much?).

Let us know if you've been thru this, and how you resolved it.

Or, let us know what other Annual Audit problems you may have had (or have now) so that other posters may respond.

Cheers.

I employ a full time acountant just to keep my feet out of hot water, from similar cash descrepincies as you have outlined above, even though I try to keep everything above board. We had the state auditor through 3 months ago. No real problems, as long as everything appears to be inside the envelope.

As an accountant here pointed out to me. No probs. Just make sure your stock take tallys with your sales. Never get caught making fake invoices, or buying VAT invoices to bolster your expenses.

Cheers,

Soundman.

[billaaa777]

Example 1: During times that company was losing money, bosses would simply "deposit" money into the company's account so that the company would have enough cash to meet it's obligations. No, there was no proper documentation of this in the form of "Capital Infusion" or anything like that. Just the deposit slip and/or an incoming remittance from home country. Therefore, there was money coming "into" the company and can be seen on the bank statement, but since it wasn't due to a sale, there isn't any receipt issued by my company to back it up.

This is easily corrected. You will need to make a few adjusting journal entries on the dates that correspond to your bank statement for the deposits. The entries will be made to contributed capital which will increase the owners equity in your firm.

[junkofdavid2]

Example 1: During times that company was losing money, bosses would simply "deposit" money into the company's account so that the company would have enough cash to meet it's obligations. No, there was no proper documentation of this in the form of "Capital Infusion" or anything like that. Just the deposit slip and/or an incoming remittance from home country. Therefore, there was money coming "into" the company and can be seen on the bank statement, but since it wasn't due to a sale, there isn't any receipt issued by my company to back it up.

This is easily corrected. You will need to make a few adjusting journal entries on the dates that correspond to your bank statement for the deposits. The entries will be made to contributed capital which will increase the owners equity in your firm.

Thanks Bill!

Really appreciate it....

Now my only problem is the payments for which I don't have receipts from suppliers/landlord, etc.

What's the worst that can happen for that? I simply won't be able to deduct it as an expense? If that's the only repercussion, I can live with that...

Cheers.

[billaaa777]

Example 2: Office rental is 30,000 a month. The Thai landlord only gives receipt for 20,000 as is his policy with all the other tenants in the building. Therefore, company has an expense receipt for 20,000, but the bank statement will show a deduction of 30,000

I have a Master’s Degree in Accounting and I am a CPA. This is what I would do to address that situation.

Auditors like audit trails or paper trails to justify expenses or income, so I would create one for them and record the full expense for rent. Then before the audit starts I would explain in detail the situation and show them the documentation you have provided and inquire if they are going to allow the expense. If they don’t then find another auditor who will permit the expense. Because, auditors also like money too, and the paper trail you will have created should justify the expense.

Next, I would go to the landlord and inform them that your firm is going to be audited by the revenue department, which is going to discover that you have been paying 30,000 for rent expense but only been receiving a 20,000 invoice for that expense. I would then tell the landlord that this will trigger an audit of their firm and not only will they be responsible for the interest and penalties on you’re under reporting portion of their income, but also all there other tenants. Hopefully, this will provide the landlord a little motivation to provide you the proper invoice.

This is how I would create the paper trail for the rent expense. First, I assume you have a lease that states the rent is 30,000 monthly; I would make 12 copies of it. Next, I would take the invoice you receive from the landlord for 20,000 and create a hand written one yourself for the additional 10,000. Then make a copy of your bank statement each month showing the withdrawal or payment of the rent. I would then staple all of this together for each month. The receipt from the landlord for the 20,000, the invoice you created for the additional 10,000, the copy of the bank statement showing the withdrawal each month and finally a copy of the lease showing the lease expense is 30,000 and I would do this for all twelve months. This should solve your problems, I hope. Good Luck.

[junkofdavid2]

Thanks for the info Bill!

Actually, yes. I shouldn't have a problem proving we actually pay 30k instead of 20k.

Firstly, we have 2 rental contracts, 1 for the 20 k, and another separate one for 10k for "additional" payment to the landlord (?).

Secondly, the entire 30k is paid to him monthly using just one company check addressed to his name.

That's a strong paper trail enough!

To be honest, I'm wondering what kind of imbacil he is to think he wouldn't get caught by the Revenue Department, issuing a lower receipt when there's a very clear paper trail in cheque form implicating him.

On the other hand, maybe I'm the imbacil for not knowing that he can easily get away with that kind of stuff "because he's Thai and the Revenue Dept. will let him do it the Thai way"???

What do you think?

It's mind boggling to me, don't you agree? How does he (or the Thais in general) get away with it? (if at all)

[p_brownstone]

Example 1: During times that company was losing money, bosses would simply "deposit" money into the company's account so that the company would have enough cash to meet it's obligations. No, there was no proper documentation of this in the form of "Capital Infusion" or anything like that. Just the deposit slip and/or an incoming remittance from home country. Therefore, there was money coming "into" the company and can be seen on the bank statement, but since it wasn't due to a sale, there isn't any receipt issued by my company to back it up.

This is easily corrected. You will need to make a few adjusting journal entries on the dates that correspond to your bank statement for the deposits. The entries will be made to contributed capital which will increase the owners equity in your firm.

That solution would work of course, however it would also lock the Funds permanently into the Company as Paid up Capital.

If you do not wish to do that - i.e. if at some time in the future when you start making a profit the "bosses" would like to be repaid whatever they deposited into the Company - it would be better to record the Funds in your Accounts as "Loans from Directors" or simply "Loans" .

Patrick

[p_brownstone]

Example 2: Office rental is 30,000 a month. The Thai landlord only gives receipt for 20,000 as is his policy with all the other tenants in the building. Therefore, company has an expense receipt for 20,000, but the bank statement will show a deduction of 30,000

Then before the audit starts I would explain in detail the situation and show them the documentation you have provided and inquire if they are going to allow the expense. If they don’t then find another auditor who will permit the expense. Because, auditors also like money too, and the paper trail you will have created should justify the expense.

I suggest that you do NOT do this:

1) Particularly for a small Company in Thailand, Auditors are not that easy to find. There are a limited number who are properly licenced and to a large extent they can pick and choose their Clients.

2) Any prospective new Audit Company you approach will undoubtedly ask the present incumbent why they are being dismissed. A truthful answer – that they would not approve certain Expenses – will almost certainly result in the new Auditors refusing to accommodate you.

3) A change in Audit Company in Thailand, again, particularly for a small Company, is like a red flag to a bull – the bull in this case being the Revenue Department.

Expect VERY close scrutiny of your records.

Next, I would go to the landlord and inform them that your firm is going to be audited by the revenue department, which is going to discover that you have been paying 30,000 for rent expense but only been receiving a 20,000 invoice for that expense. I would then tell the landlord that this will trigger an audit of their firm and not only will they be responsible for the interest and penalties on you’re under reporting portion of their income, but also all there other tenants. Hopefully, this will provide the landlord a little motivation to provide you the proper invoice.

I STRONGLY suggest you do not do THIS!

As a Farang in Thailand - either as an individual or as a small Corporate entity - the absolute worst thing you can do here is to attempt to coerce or threaten a Thai.

I can guarantee that the local Revenue Department already knows that your landlord is under-reporting his income, and either they don’t care or – more likely – they call on him every 3 or 4 years for an Audit and he pays the “fines” and walks away smiling.

Any attempt to use this situation to embarrass or threaten him will only cause major problems for you and your Company – at best you will arrive one morning to find the locks on your Office changed, at worst …….. well read the newspapers.

Your Landlord is almost certainly doing this same thing with all tenants in your building – how many is that? Let’s say minimum 20? So in one year he is under-reporting (20 x 10,000 x 12) Baht 2,400,000.- , on which he should be paying around Baht 700,000.- in tax .

Do you seriously think he’s going to allow some small Farang - individual or Company – to make him lose that amount of money?

I have a Master’s Degree in Accounting and I am a CPA. This is what I would do to address that situation.

billaaa777, I truly believe you mean well, but the “Master's (sic) Degree in Accounting …….and … CPA” qualifications you use to validate your advice were earned in an environment totally different to that which pertains in Thailand

As I mentioned in an earlier Post, I think you should consider the fact that Posters on this Board are asking questions which are Thailand specific; general advice or speculation based on US situations could be misleading and, worse, harmful.

Patrick

Edited February 27, 2007 by p_brownstone

[junkofdavid2]

Thanks to everyone for all their inputs, and I (and other posters) continue to learn from all your views.

Actually, I don't mind so much if I can't deduct "this or that" as an expense, and I don't mind paying more tax than I should. I'm still operating at a loss (albeit a smaller one) and there's word going around now that it'll be harder to renew WP with a loss instead of a profit.

The only issue therefore, about not being able to deduct a certain expense, is that the bank statements won't tally.

For example, if I can't deduct a 10k rent expense, that's fine with me. But then there'll still be a 10k payment seen in my bank statement. How would this "non-tallying" 10k payment affect the audit?

Interesting question aye...?

[p_brownstone]

Thanks to everyone for all their inputs, and I (and other posters) continue to learn from all your views.

Actually, I don't mind so much if I can't deduct "this or that" as an expense, and I don't mind paying more tax than I should. I'm still operating at a loss (albeit a smaller one) and there's word going around now that it'll be harder to renew WP with a loss instead of a profit.

The only issue therefore, about not being able to deduct a certain expense, is that the bank statements won't tally.

For example, if I can't deduct a 10k rent expense, that's fine with me. But then there'll still be a 10k payment seen in my bank statement. How would this "non-tallying" 10k payment affect the audit?

Interesting question aye...?

Undocumented outgoings - i.e. payments from the Company Bank Account without receipts - will usually not be accepted as a legitimate expense to be charged against the Company Profit and Loss Account.

If, as you say, you are willing to accept this you can simply record these payments as a partial repayment of the "Loans from Directors" - see my earlier reply.

The "Loan" I mentioned earlier is a Liability in your Accounts and would be reduced by the apparent payment of Baht 10,000.- every month (the money you paid to your Landlord but for which you have no receipts).

To put it simply: any undocumented Income, "deposits from the Bosses" or whatever, and any undocumented Expenses - e.g. the Landlords "additional" charge etc. would just go into the one "Loans from Directors" Account in your Company General Ledger, so all "Cash at Bank" records in your Accounts and the actual movements in your Bank Statement agree.

Neither of these - receipts or payments - affect your Company profitability as shown on your Profit and Loss Account since they are not the result of buying / manufacturing Products etc. and then selling them on in the course of commercial business; the transactions show only on the Balance Sheet, and to a large - a VERY large - extent the P & L Statement is all the Auditor, and more importantly, the Revenue Department, look at.

Patrick

Edited February 27, 2007 by p_brownstone

[billaaa777]

T

hat solution would work of course, however it would also lock the Funds permanently into the Company as Paid up Capital.

If you do not wish to do that - i.e. if at some time in the future when you start making a profit the "bosses" would like to be repaid whatever they deposited into the Company - it would be better to record the Funds in your Accounts as "Loans from Directors" or simply "Loans" .

Patrick

Patrick, please explain why the funds would permanently tied up in Contributed Capital. Are you suggesting that Internationally Generally Accepted Accounting Principles don’t permit “Stock Buy Backs?” Are you saying that at a latter date an adjusting journal entry which would be a debit to Contributed Capital and a credit to loans payable is not permitted? Patrick, although there are instances where a firm would want to increase their liabilities and decrease their owner’s equity in my experience of over twenty years as a Controller, Corporate Controller and CFO I have found these rare for the most part. Please explain why you consider reducing the value of the firm a better alternative?

billaaa777, I truly believe you mean well, but the “Master's (sic) Degree in Accounting …….and … CPA” qualifications you use to validate your advice were earned in an environment totally different to that which pertains in Thailand

As I mentioned in an earlier Post, I think you should consider the fact that Posters on this Board are asking questions which are Thailand specific; general advice or speculation based on US situations could be misleading and, worse, harmful.

Patrick

Patrick that’s good to know, I will inform Thailand’s most prestigious university where I have been a professor at for the past three years that Patrick believes my expertise does not apply in Thailand. Especially since they allow me to write my own courses, select the teaching materials and bring in special speakers.

Each semester we bring in three or four large and small accounting firms to address the class where the students are permitted to ask questions. Since the majority of the students have parents that own companies these types of questions usually come up. I will be glad to inform the managing directors of these firms that Patrick does not believe their advice on this specific accounting issue should be followed.

I only teach as a hobby to keep by brain working, the rest of my time I spend running my business which earns millions of Baht annually. I never permit a Thai or any other person for that matter screw me, rip me off, steal from me, or provide inadequate labor so that they can “Save Face.” But, Patrick you do what you want, it’s your business and it’s your money.

[p_brownstone]

I do not intend to get into a personal argument old chap – nor do I denigrate your Qualifications.

That said, teaching Accounting theory in Thailand is one thing, however I do not believe that any of your practical experience has involved preparing Accounts etc. for a small to medium size business here, replacing Auditors or dealing with Government Financial authorities.

Rule Number 1 here is to keep things as simple as possible and in particular do nothing which will draw the attention of the Revenue Department; changing Auditors and cute though theoretically acceptable transactions like Stock Buy-backs will certainly do that.

In other words your advice to the OP on a way to handle his actual Accounting problem was theoretically correct in line with generally accepted Accounting principles but did not make allowances for the unique circumstances of doing business in Thailand, in that::

1) The OP may not WANT to increase the Paid up Capital of his venture here.

3) He may have wanted a - simple - way to repay the Funds deposited in the Company.

3) Your lack of experience in dealing with authorities such as the Revenue Department, would probably cause him more problems later, had he adopted your solutions.

Bottom line (pun intended!), your Accounting advice was correct as far as it went but was not completely thought through, something which may be forgiven.

However your advice that he initiate a confrontation with his landlord was, frankly, irresponsible.

Patrick

[junkofdavid2]

Question:

What's the worst that can happen if your (Ltd.) company's bank account shows expenditures which auditor will not accept, or is not supported by receipt (due to receipt loss or whatever)?

*Take note that if you can't declare the expenditure as an expense, your bank statement and income statement will not tally.

Which among the scenarios below is most likely to happen? (Feel free to add)

Consequence #1) Is it that you can't declare it as an expense, and therefore have to pay more tax? (I don't mind it if it's this)

Consequence #2) You have to "return" money into your company's corporate bank account.

Consequence #3) You have to pay huge fines or even have a case with the government.

Consequence #4) The auditor will refuse to sign the Audit of Financial Statements, even if you are willing to not deduct the expense, and you won't be able to file the annual audit... and you will therefore be in "limbo" with the government.

Edited March 26, 2007 by junkofdavid2

[sonicdragon]

Question:

What's the worst that can happen if your (Ltd.) company's bank account shows expenditures which auditor will not accept, or is not supported by receipt (due to receipt loss or whatever)?

*Take note that if you can't declare the expenditure as an expense, your bank statement and income statement will not tally.

Which among the scenarios below is most likely to happen? (Feel free to add)

Consequence #1) Is it that you can't declare it as an expense, and therefore have to pay more tax? (I don't mind it if it's this)

Consequence #2) You have to "return" money into your company's corporate bank account.

Consequence #3) You have to pay huge fines or even have a case with the government.

Consequence #4) The auditor will refuse to sign the Audit of Financial Statements, even if you are willing to not deduct the expense, and you won't be able to file the annual audit... and you will therefore be in "limbo" with the government.

I believe the likely consequence is 1. In general, the Revenue Department only cares about you falsely reducing the tax that you pay - so things like understating sales and overstating expenses.

I don't see why your auditor and the revenue department shouldn't accept the full 30k rental payments based on the evidence you mentioned. As for the funds received "from bosses" - it should be no problem at all - I assume that the "bosses" are existing shareholders ? In which case it can simply be an increase in paid up share capital. It could also be treated as a loan, as mentioned earlier in this thread, directors loan or otherwise. I guess it depends on what the "bosses" had in mind when they sent the funds.