The growth in ecommerce and online retailing brings with it its own set of problems in terms of adapting to a new business model and using the latest technology. However, one thing often overlooked when embarking on the road to ecommerce is the need to keep proper track of business transactions and the associated financial data.
Ah, I hear you say, it's all recorded on the computer. But what happens if you have a major disaster and you lose all your precious trading and accounting information? With traditional paper-based accounting you have at least a paper trail to refer back to, and even though this can be quite laborious, you should have some form of documentary evidence to determine what happened and when it happened.
Unfortunately, with more business being conducted electronically, many companies have only a collection of bits and bytes to say what went on.
In essence, running a business solely on a computer is really no different from any other more traditional way of trading. You must keep a proper record of all business transactions, no matter how they are conducted. As a result, with legislation stipulating that all financial account information must be kept for a minimum of six years, it could prove difficult indeed to satisfy auditors and government officials if they need to delve deeply into the past.
The most important aspect of satisfying auditors is the religious maintenance of accurate business records.
Nigel Cockburn, VAT partner at PricewaterhouseCoopers, says: "Physical evidence supporting any transaction should be maintained. It is the responsibility of the person registered for VAT to maintain records of all taxable goods or services received and supplied in the course of doing business, together with any exempt supplies, gifts, loans, self-supplies or goods used privately.
"Records should therefore be kept of correspondence, emails and payments, although they may be preserved in an electronic format. Invoices may be sent or received by email, but must be capable of reproduction."
Here the key phrase is 'capable of reproduction'. There is nothing to stop you from storing all business-related data in electronic form, but it must be easily accessible for auditing purposes. Generally, this means that you must ensure that it can be printed in some form if it becomes necessary.
"In addition to the preservation of full original records, Customs and Excise has approved the use of microfilm and microfiche as long as it is notified regarding the transfer of the data and the records can be reproduced for viewing by Customs officials if queried," says Cockburn.
"Computer records may be stored on tape or disk and must be convertible into a legible form if Customs and Excise asks to see them. Where records are kept on a computer, Customs and Excise has the right to access it to check its operation. In addition, Customs and Excise may impose any reasonable requirements as necessary to ensure that the information is readily available."
According to E centreUK, the association for standards and best practices in electronic trade in the UK, many businesses are unsure what specific records need to be kept. Andy Coote, chairman of the accountancy interest group of E centreUK, says there are two categories of records that businesses must keep. "Some records need to be retained in the short term to support the business recovery plans and to be available to resolve queries. In the longer term, they should be archived," he says.
"There is no definitive advice on what records should be archived in the European Union. All advice is interpretations of the rules relating to paper records. General record-keeping rules are set out in a number of acts of Parliament, primarily the Companies Act in the UK. The rules vary overseas, and internet trading organisations may be liable for keeping records of other countries' rules.
"As a default we would advise that businesses should keep one version of all transactions including all data fields and all related standing data and parameters for seven years when trading in the UK and 10 years for any overseas requirements. In addition, you should retain certain contracts and other important documents, such as long-life property leases and mortgage deeds for ever."
However, it is the fact that ecommerce can be conducted globally that poses the biggest problem for most businesses.
Ken Parkinson, senior vice president of European, Middle Eastern and African sales at GlobeID Software, says: "Merchants need to meet the audit trail and legal requirements of their specific countries. This is not an issue for the suppliers of the new ecommerce platforms, but more of a discussion between the merchant and their auditors. Most customers that we have worked with have already identified any possible concerns raised by their finance departments and auditing agents and have re-engineered their business practices - and in some cases their ecommerce system reports - to compensate."
With any system, managers need to ensure the processes involved in conducting ecommerce are properly controlled and, where necessary, secured.
"Ecommerce is a wide-ranging topic which includes specific exchanges of data bilaterally, and wide-scale publication on websites," says Coote. "Management needs to consider the confidentiality, integrity and availability of that data in the light of the business needs and exposures. Standing data, outgoing transactions - whether to a partner or to be published on the web - published information sources and incoming transactions of many types will need to be considered and the correct controls applied, securing some or all of the transactions where necessary.
"The accountancy interest group of E centreUK is addressing this requirement with a guide to controls and security for ecommerce. This will include control checklists relating to the current and future models of ecommerce, security techniques and advice on their applicability and legal and taxation issues."
The right software
The capabilities of the software used for conducting ecommerce are vital. Any software must be able to maintain proper records of past transactions.
Open Market provides ecommerce software for transaction processing which is used by companies such as Cable & Wireless, Siemens, France Telecom, Acer, Sony and Oxford University Press.
Mike Carter, Open Market's Europe, the Middle East and Africa sales engineer, believes that any decent ecommerce software should provide comprehensive audit trails and transaction logging.
"Open Market Transact has an audit trail for all changes to an order during its lifetime," he says. "For example, if you purchase five items and only three are shipped and two are placed on back order, then after the back-ordered items are shipped, the order contains a complete history of what was shipped when and how much was charged at each stage. In addition, each order is digitally signed using a 32byte authentication code. This means the origin of any order can be determined. It will also state whether it came from a particular Transact system."
Excise does matter
As far as satisfying the authorities is concerned, Carter says: "Transact uses digital tickets to allow download only if the buyer has a valid digital receipt that verifies he/she has purchased the goods. All access is logged. Customs and Excise can see this log, although its acceptance of this form of record in ecommerce is still in the early stages. It has, however, certified the way in which Transact calculates VAT.
"It's difficult for dealers to become tax advisors, therefore all they can do is be aware of current regulations and advise their customers accordingly. However, as in any other IT scenario, the dealer's contribution is to provide software that has all the functionality required to track and trace the information required and calculate necessary charges to pass on to customers. This is one area where dealers do need to be wary as many systems do not have this functionality as they are essential toolkits or store-front creation tools."It can take years to get the government sign-off on VAT issues, so many software providers avoid this area. Open Market was operating in the UK market for over two years before it was able to get VAT calculations accepted in 1997."
Parkinson says dealers should seek the advice of software vendors that have experience of implementing these systems. "In nearly all cases, the software vendor will have addressed these issues with previous customers and can best advise the dealer on how to treat this problem with its specific customer," he says.
Into the archives
While most people are aware of the need to back up their data so that their systems can be recovered in the event of a catastrophe, the archiving of data for historical purposes is something completely different.
Data back-ups tend to be short-lived and, as such, backing up to magnetic media is both cost-effective and convenient. Magnetic media is reusable and generally quite reliable over the short term. However, it is precisely the rewritable nature of magnetic media that is the main drawback when it comes to the long-term archiving of records.
The main point of an archive is to preserve information in a readable form for as long as possible, and this implies the information is unalterable, as if it were written in stone. Therefore, for the purposes of creating historical archives, write-once-read-many (worm) technology, such as optical disc, should be considered in preference to any form of magnetic media.
"Depending on the records and their significance, it may be necessary to prove that no change has been made to the record since it was created. This is why in the past, paper records were the obvious answer; it was relatively easy to prove that something was original or to spot if it had been changed in any way," says Coote.
"The British Standards Institute has produced information on electronic document security and it recommends the storing of document images on microfilm or on optical disc as the best method, as information cannot be changed after creation."
The big question now is how to ensure that data recorded as long as five or six years ago is still fully accessible should the need to provide some form of documentary evidence arise.
Over the years, we've seen numerous data storage technologies come and go. The original 8in floppy disk was superseded by the 5 1/4in floppy which in turn was ousted by the 3.5in diskette. Exactly the same thing has happened with optical storage technology with things such as DVD-Rom replacing CD-ROM. Therefore, if data is to be archived for several years, you need to be pretty certain the media used will be readily accessible in the future.
Put to the test
Coote says historical archives need to be validated for accessibility. "As part of software and hardware upgrade strategies, stored data needs to be tested to ensure continuing access, especially when new technologies are introduced. If necessary, you may need to transfer archives from older technology which is on its way out, to the latest recording media to preserve it and ensure that it is future-proof."
The problems of recording ebusiness transactions and being able to reproduce them for auditing are great. All businesses have a responsibility to keep proper accounting information and they need to safeguard themselves by adopting suitable methods of archiving data. The growth in ecommerce can only compound the problem as paper is increasingly displaced by bits and bytes.
As users of ecommerce, dealers need to ensure they control and secure their data and that of their customers. They also need to make potential customers aware of the auditing implications of ecommerce. Raising such issues demonstrates professionalism and gives dealers the chance to add value from consultancy.
- All businesses have a legal obligation to keep accounting records for a minimum of six years
- Customs and Excise has a right to demand documentary evidence of business transactions
- Ecommerce software should encompass the proper archiving of transaction information
- When trading internationally, different countries have different legal requirements for record keeping
- Magnetic media is not suitable for long-term archiving, optical worm media is preferred
- Be aware of changes in technology as these may render existing archives obsolete and inaccessible.
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