As a company director, you are personally responsible for the accuracy of the company’s accounts. Not your accountant. You. If the accounts contain errors that cause the company to trade while insolvent, overstate profits, or mislead creditors, the consequences fall on you as the director who approved them.
We see directors assume that hiring an accountant transfers the responsibility for the accounts. It does not. Section 174 of the Companies Act 2006 requires you to exercise reasonable care, skill, and diligence. Section 386 requires you to keep adequate accounting records. If the records are wrong and the company enters insolvency, the liquidator will ask two questions: what errors were in the accounts, and did you know or should you have known? We have worked with directors who signed off accounts showing the company was solvent when it was not, because they trusted the numbers their bookkeeper gave them without checking. The liquidator held the director responsible, not the bookkeeper.
Quick Answer: Director Liability for Accounting Errors
You are liable if accounting errors led to: (1) the company trading while insolvent because the true position was not visible, (2) dividends being paid when the company did not have distributable reserves, (3) HMRC receiving incorrect tax returns, (4) creditors being misled about the company’s financial position, or (5) the company’s statutory accounts being filed at Companies House with material inaccuracies. The liability arises from your duty to maintain adequate records and exercise reasonable care, not from the specific error itself.
Common Accounting Errors That Create Director Liability
We see these patterns regularly in insolvency investigations:
Failure to recognise insolvency. The management accounts showed the company was profitable, but they did not include accrued liabilities, deferred tax, or contingent claims. The director relied on the accounts and continued trading. The liquidator concluded the company was insolvent months earlier than the director claimed.
Overvalued debtors. The accounts showed £200,000 in trade debtors, but £80,000 of that was aged beyond 90 days and uncollectable. The balance sheet looked healthy. It was not. We have seen directors who never wrote off a bad debt because it made the numbers look worse.
Undisclosed liabilities. A VAT assessment the director knew about but the bookkeeper did not include. A personal guarantee that was not reflected in contingent liabilities. A pending legal claim that was not provisioned. Each of these understates liabilities and overstates solvency.
Dividends paid from non-existent profits. The accounts showed distributable reserves, but the accounts were wrong. The dividends were unlawful under section 830 of the Companies Act 2006, and the liquidator can recover them as transactions at undervalue or as a misfeasance claim.
Incorrect tax returns. VAT returns that understated output VAT. Corporation Tax returns based on inaccurate accounts. PAYE submissions that did not match actual payroll. Each of these creates a separate liability with HMRC, and directors can face personal penalties for careless or deliberate inaccuracies.
Your Duty to Keep Adequate Accounting Records
Section 386 of the Companies Act 2006 requires every company to keep accounting records that are sufficient to show and explain the company’s transactions, disclose with reasonable accuracy the company’s financial position at any time, and enable the directors to ensure that any accounts prepared comply with the Act.
Failure to keep adequate records is: (1) a ground for director disqualification, (2) a factor the liquidator cites in the conduct report, and (3) in some cases a criminal offence under section 387 if the failure was deliberate or reckless.
We find that “inadequate records” does not mean no records. It means records that do not tell the truth. A company with a full set of management accounts that materially overstate the position has inadequate records. A company with no management accounts at all has inadequate records. Both trigger the same duty breach.
Can You Blame Your Accountant?
No. Delegating the preparation of accounts to an accountant does not delegate the legal responsibility. The duty under section 174 requires you to exercise reasonable care and skill. If you signed off accounts without reviewing them, without asking questions about figures that looked unusual, or without understanding the assumptions behind the numbers, you breached that duty.
You may have a separate claim against your accountant for professional negligence if they prepared the accounts carelessly. But that is a claim between you and the accountant. It does not reduce your liability to the company or its creditors. We tell directors: your accountant prepares the numbers. You are responsible for the numbers. If you do not understand them, ask. If you sign something you do not understand, you own the consequences.
We have seen directors successfully recover from their accountant in negligence, but only after they had already paid the misfeasance claim to the liquidation estate. The recovery from the accountant came second, took longer, and cost legal fees on top.
What to Do If You Discover Accounting Errors
Correct the records immediately. Restate the accounts to reflect the true position. File amended returns with HMRC if tax returns were affected.
Assess whether the company is actually insolvent. The corrected figures may show the company was insolvent earlier than you thought. Use our guide on how to check if your company is insolvent.
Stop paying dividends. If the accounts overstated profits, dividends may have been unlawful. Do not pay further dividends until the position is confirmed.
Document the correction. Record when you discovered the error, what the error was, what you did about it, and what professional advice you took. This contemporaneous record protects you if the correction is later scrutinised.
Seek advice. If the corrected figures show the company is insolvent, you need insolvency advice. If the errors are material and affect HMRC, you may need tax advice. Company Debt connects directors with licensed insolvency practitioners. A confidential consultation will clarify your position.
How We Wrote This Article
This article was written by the Company Debt editorial team based on the Companies Act 2006 (sections 170-177, directors’ duties; sections 386-389, accounting records; section 830, distributions), the Insolvency Act 1986 (section 212, misfeasance), HMRC penalty provisions for inaccurate returns, and practical experience from cases involving accounting errors handled by licensed insolvency practitioners in our network. The article was reviewed by Chris Andersen, a licensed insolvency practitioner regulated by the IPA.
Company Debt is a commercial service that connects business owners with insolvency professionals. We may receive a fee when you engage a practitioner through our service. This does not influence our editorial content or recommendations.
FAQs About Director Responsibility for Accounting Errors
Am I liable if my accountant made the error?
Yes. The legal duty to maintain adequate records and exercise reasonable care is yours as director. Delegating to an accountant does not delegate the responsibility. You may have a separate negligence claim against your accountant, but your liability to the company and its creditors remains.
Can I be disqualified for accounting errors?
Yes. Failure to maintain adequate accounting records is one of the grounds the Insolvency Service cites in disqualification proceedings. It is often combined with other conduct issues (late filing, Crown debt accumulation) to build a cumulative case of unfitness.
What if the accounts were filed at Companies House with errors?
You can file revised accounts at Companies House to correct material errors. The revised accounts replace the originals on the public record. If the errors affected tax returns, you should also file amended returns with HMRC. Voluntary correction is viewed more favourably than errors discovered during a liquidation investigation.
