Written by Robert Thyer in September, 2011

More often than not, when we get appointed to a new matter, whether it be turnaround or an insolvency one of the first things we ask is “Where are your records?”. Many people misunderstand the importance of keeping proper books and records and the far reaching effects of not keeping them.

Section 286 of the Corporations Act 2001 (“the Act”), states that at a minimum, a company has an obligation to keep financial records that both correctly record and explain its transactions, financial position and performance, and would enable true and fair financial statements to be prepared and audited.  Section 9 of the Act provides a definition of “financial records” namely:-

1. Invoices, receipts, orders for the payment of money, bills of exchange, cheques, promissory notes and vouchers; and
2. Documents of prime entry; and
3. Working papers and other documents need to explain:
4. the methods by which financial statements are made up; and
5. adjustments to be made in preparing financial statements.

Some organisations think that a collection of receipts and some cheque stubbs in a shoe box will be sufficient to cover all of the above. This is not the case.

In Van Reesema v Flavel (1992) 10 ACLC 29, the Court upheld that just mere financial records were not enough to satisfy the criteria of “sufficient records”. General journals, general ledgers, source documents and a journal explaining the transactions are required to meet the criteria and nothing less is acceptable.

But what happens when you do not satisfy the above criteria? In ASIC v Plymin (2003) 46 ACSR 126 the Court produced a checklist for indicators of insolvency, one of the indiators on that checklist was an inability to produce timely and accurate financial records. So to put that matter simply, if your books and records are not up to standard, your organisation may deemed to be insolvent for the duration that it did not keep proper books and records. However, proving insolvency purely based on a lack of books and records is not an easy task by any stretch.

One of the final issues with not having proper books and records is that it only becomes noticeable after a problem has developed. Commonly when organisations are facing times of turmoil, they will neglect maintaining their books and records in favour of securing their business’ success irrespective of most other issues. Without property maintained proper books and records, you will be unable to rely on them in order to bargain with creditors should you fall into difficulty, they will be showing you a picture that does not accurately reflect the true financial position and strength of the business.

So you need to ask yourself, are your organisation’s books and records up to date?

PLEASE NOTE:  All information contained in the articles below was correct at time of publishing.