Risks related to balance confirmation
Companies often forget that confirming balances is more than just checking amounts. In particular, problems may arise in the case of disputed or doubtful claims.
What is included in the balance confirmation
The Accounting Act requires, in principle, confirmation of the balance of receivables. On the other hand, the Accounting Act does not require sending confirmation of the balance of liabilities.
As at the balance sheet date, all assets and liabilities should be inventoried. Entities perform the annual inventory in three ways, depending on the asset or liability they are dealing with. And so, the annual inventory is carried out by way of:
- physical inventory,
- balance confirmation,
- comparison of accounting data with relevant documents.
The method of balance confirmation involves obtaining statements from contractors and banks on the items appearing in the accounting books. This method is used to determine the balances of financial assets held in bank accounts or held by other entities, receivables, including loans, and own assets entrusted to contractors.
However, as practice shows, entities send requests to their contractors for confirmation of the balance of liabilities, assuming that this is a solution that allows to reliably verify the balances.
The lack of balance confirmation
No response from the contractor to the request for confirmation of the balance of receivables is not a silent confirmation of the balance. And that effect will not be changed by any additional provisions placed by the companies sending requests for the balance confirmation in the forms they use for this. This is because no provisions provide for a presumption of acceptance of the balance by the debtor’s passive behavior.
Balance confirmation vs improper debt recognition
In jurisprudence and legal science, a balance confirmation is considered an improper recognition, indicating that it is a kind of a statement of knowledge, also containing certain elements of a declaration of will. However, only the behavior of the obligated party or persons whose actions can be attributed to the obligated party, in particular persons acting as bodies, attorneys, statutory representatives and employees in positions related to the competence to make statements of knowledge about the obligations of a given entity, may be qualified as an improper recognition of a claim1. This means that employing a specific person as chief accountant or commissioning accounting services to an external accounting office, in the circumstances of a given case, may be tantamount to granting that person a power of attorney to make such statements with regard to balance confirmation, with all the consequences thereof.