I arrived at the office one morning and saw my Office Manager and one of the senior management reporting to him discussing on who was gooing to explain to the client the issue found out when reviewing the financial statements of a client. The client was a difficult one. As soon as arrived and said good morning, they both looked at me and smiled…..
Few minutes later, there I was going, on a nearly impossible mission: to convince General Manager and one of the founders of a medium size company that the financial statements, in particular the profit and loss account, had to be adjusted significantly. Otherwise we had no other option but to issue a qualified audit opinion.
When I arrieved at the client’s premises, the General Manager was already there. His expression was serious as he had already been talking to my Office Manager. Great, no pressure!….
The issue was about reflecting as income the tasks of the last part of the process required to finish the products. These different tasks and activities involved human labour, the utilisation of a special building and some raw materials like salt. If all this was reflected in the profit and loss account as income under the paragraph of finished product increase, this would cause an increase in the profit line and hence, in the company taxation.
The general manager’s argument was that there was no manufacturing, no “fabrication” at the last stage when the product was being finished.
My argument was: “Excellent! Then you have a spare building and spare staff so you can reduce costs by reducing staff and increase cash flow by selling the building, and all this last part of the process before the product is fully finished is not needed. So, get right now all these product items out of the building, pack them and send them to clients.
This can be explained in a paragraph in the notes to the financial statements.”
I clearly meant it and was very serious when I told him all this.
The General Manager answered that he could not do that as the product was not finished. So he clearly saw that there was not an argument but an adjustment to make into the profit and loss account to gather the value added of the last part of the production process.