Restoring accounting records: stages, documents, timelines

Signs that the books need restoring

• Returns were filed, but the ledgers for the period are missing from the software or not closed.
• Account and cash balances in the database do not match the bank and the cash book.
• Balances with suppliers and customers have not been confirmed by reconciliation statements for years.
• Accounting data differ from tax returns on revenue, VAT or payroll.
• Several accountants kept the books in succession, and the database was handed over without closed periods.
• A statutory audit, tax audit, loan, sale of a stake or investor entry is coming up.

What is restored and by which rules

Restored books must meet the same requirements as books kept on time: complete, continuous, documented, using double entry (Article 4 of the Law “On Accounting”).

• Primary documents — with mandatory details (Article 14). For transactions of the period for which supporting documents have not been obtained, an appropriate primary document is drawn up.
• Amendments to primary documents without confirmation from the parties to the transaction are not allowed, and corrections in bank and cash documents are prohibited altogether (Article 14).
• Ledgers — journals, statements, books, including electronic ones (Article 15).
• Balances of assets and liabilities are confirmed by a stock count (Article 16) and reconciliation statements.
• Taxes are recalculated for each tax for the periods being restored.
• Financial statements are re-prepared if the restored data differ from those filed.

Stages of work and the result of each

• Diagnostics — a list of closed and unclosed periods, a list of missing documents, an estimate of the workload.
• Plan — which periods and areas come first: years still open to tax audit, and areas where a discrepancy gives the largest amount of tax.
• Collecting primary documents — requests to counterparties, bank statements, data from the e-invoicing system and the taxpayer’s personal online account.
• Rebuilding ledgers — transactions are posted again in chronological order, periods are closed month by month.
• Reconciliations and stock counts — balances of cash, inventories, fixed assets and settlements are confirmed.
• Taxes — recalculation of liabilities and a register of differences from the returns filed, with a calculation for each item.
• Handover of results — an accounting database with closed periods, confirmed balances (reconciliation statements, count sheets), a register of tax differences with tax and late-payment interest calculated, amended returns at your decision, recommendations on document flow and the accounting policy.

Which documents to prepare

• Access to the accounting software (if the database survives) and to the taxpayer’s personal online account
• Bank statements for all accounts for the periods being restored
• Contracts, acts, waybills, invoices — on paper and electronically
• Cash documents and expense reports
• HR orders, timesheets, payroll statements
• Tax returns and financial statements filed, reports of past audits
• Charter and decisions of participants

For what period to restore: three time limits in the law

The period that can be audited is shorter than the period for which documents must be kept — these two rules are often confused. Periods older than three years are revisited when an external reason requires it: a buyer’s due diligence before a transaction, a dispute with a counterparty, a condition of a loan agreement.

• As a general rule, 3 years after the end of the tax period — the limitation period for a tax liability, within which the tax authority may carry out an audit (Article 88 of the Tax Code). For tax benefits, rates, deductions and deferrals tied to meeting conditions, this period is extended for as long as the conditions apply (Articles 84 and 88 of the Tax Code).
• At least 5 years after the reporting year — the retention period for primary documents, ledgers and financial statements (Article 29 of the Law “On Accounting”).
• At least 3 years following the year of filing — the retention period for tax returns and the documents attached to them (Article 84 of the Tax Code).

Tax risks and how to reduce them

Restoration often reveals underpayment. If an error led to understated tax, the taxpayer must file an amended tax return (Article 83 of the Tax Code). When it is filed after the tax payment deadline, liability is waived if two conditions are met at the same time: the amended return is filed before the company learned that the tax authority had found the understatement or scheduled a tax audit, and the missing tax and late-payment interest are paid before filing.

Late-payment interest accrues for each calendar day of delay (Article 110 of the Tax Code). If, however, an audit finds the discrepancy and classifies it as concealment (understatement) of the tax base — for example, revenue not recorded in the accounting ledgers — the fine is 20% of the concealed base, and the taxes are additionally assessed (Article 223 of the Tax Code). The head of the company and the chief accountant are fined 3–7 BCV for failing to ensure reliable accounting and to carry out stock counts, i.e. UZS 1.32–3.08 million at a BCV (base calculation value) of UZS 440,000 (Article 175¹ of the Code of Administrative Responsibility).

Timelines of the stages

The duration depends first of all on how well primary documents and the database have survived, not on the company’s turnover. Diagnostics is the shortest stage, and after it a timeline can be given on solid grounds. Document collection is the least predictable: it depends on how quickly counterparties and the bank respond. Rebuilding ledgers and recalculating taxes grow with the number of transactions and periods.

If the company is subject to a statutory audit, the restored data are needed before the audit: annual financial statements under NAS (national accounting standards) are filed no later than 1 March (para. 7 of Regulation reg. No. 3567), and a copy of the auditor’s report no later than 15 June (Article 35 of ZRU-677). At the same time, the organisation that restored the books may not then audit the same period, whether in a mandatory or voluntary audit (Articles 32 and 34 of ZRU-677).

Typical mistakes in restoration

• Backdating corrections to old documents instead of drawing up the missing ones: amendments without confirmation from the parties to the transaction are not allowed (Article 14 of the Law “On Accounting”).
• Filing amended returns without paying the tax and interest — then the condition for waiver of liability is not met (Article 83 of the Tax Code).
• Carrying balances forward without stock counts and reconciliations — they will remain unconfirmed.
• Working strictly from the oldest year, postponing the periods the tax authority may still audit.
• Entrusting the restoration to the organisation that is then to perform the statutory audit of the same period (Article 34 of ZRU-677).

What drives the cost

• How many periods and areas need restoring
• The number of transactions, bank accounts and counterparties
• How well primary documents and the accounting database have survived
• Tax regime, VAT, foreign trade operations, separate divisions
• Whether amended returns and support with filing them are needed
• Timing: work to an audit or inspection date requires a larger team