Flexible work offers benefits but pitfalls as well

Appearing in IN PRACTICE magazine, April 2020

 

Nearly three-quarters of small and mid-sized accounting practices use flexible working arrangements, according to the recent CPA study My Firm, My Future*. Remote working is common, which can mean giving employees the option to work some or all of the time from home, employing individuals to work for a fixed period from home, or using independent contractors, especially to cope with busy periods or special projects. Such arrangements can be good for both the practice and the workers but company principals should be aware of the legal issues and the management pitfalls.

“The basic distinction between an employee and a contractor is that an employee is hired to work, usually exclusively, by one business,” says Nicola McMahon, Senior Associate in the Employment Relations and Safety team at McCullough Robertson Lawyers. “They are paid a wage, after PAYG deductions, and receive entitlements, such as annual leave and personal leave.  Independent contractors work for themselves and sell their services or expertise to one or more businesses. They are paid an agreed rate without PAYG deductions although may charge GST. They do not have paid leave entitlements.”

But there is no definitive test, and sometimes legal advice might be needed. This is important because there have been cases where a business has engaged contractors, but those individuals later argued that they were, in practice, employees, and have brought claims for unfair dismissal or unpaid entitlements.  Also, the ATO may determine that an employer should have deducted PAYG tax for someone they have treated as a contractor, when they were an employee.

“There are also serious consequences for contravening the ‘sham contracting’ provisions of the Fair Work Act 2009 where an employer is found to have disguised the relationship,” McMahon notes. “There are stiff penalties if this behaviour is found to have occurred.”

Working-from-home-1

Clarity needed

Dr Jim Stanford, Director of the Centre for Future Work at the Australia Institute, likewise emphasises that employers should be aware of their responsibilities.

“Some employers might plead ignorance about their responsibilities when it comes to remote workers, but ignorance is no excuse,” he says. “Whether you are talking about employees or contractors, employers have an obligation to know and abide by the legal standards of the relationship.”

An important step is to have a clear policy on remote working. Some large firms have policy documents but many small and mid-sized firms make it up as they go along, case by case. A written policy provides certainty as well as legal clarity to both sides. It also requires managers to consider whether remote working is really appropriate for the company and the work.

“With remote working, employers benefit from not having to provide office space and technology,” Stanford says. “They may experience less absenteeism, and they may find they are able to recruit labour at a lower cost, since the workers will take into account that they don’t have to commute to work in weighing the appeal of the wage offer. On the other hand, employers don’t have clear oversight or direct control over the worker’s activity and effort. That can undermine observed productivity and the cohesiveness of the work.

“Some remote workers may enjoy the convenience of avoiding travel time and being able to work in more flexible time blocks. The downside is the possibility that work expands to take up larger and larger portions of their overall life. Their work is embedded in their homes, which can become very oppressive.”

Relationship building

Ultimately, if an employer wants someone – whether employee or contractor – who works effectively, meets deadlines, and delivers according to the brief, it is in the employer’s interest to invest time and energy in building a positive relationship.

As a part of this, employers who engage home-based employees should also be aware of the OHS issues. They need to ensure that employees working remotely have a safe work environment and are provided with appropriate tools to do their job, which may include IT equipment, desks, and chairs.  Essentially, the OHS requirements are the same as if the employee was in the office.

“Companies should regularly contact employees who work remotely to check their mental health and satisfaction,” advises McMahon. “Working from home has its benefits but it can be socially isolating.”

 

To access a copy of this report go to https://www.cpaaustralia.com.au/public-practice/managing-your-practice/my-firm-my-future

Taxing issues for 2019/2020

Appearing in In The Black magazine, March 2020

 

With the end of the current financial year in sight, tax advisers have to be aware of moves by the Australian Tax Office to improve the level of compliance as it works through existing programs and introduces some new initiatives.

Generally, the ATO is pleased with the direction of change, judging from recent comments by its head, Chris Jordan*. In the past few Budgets the ATO has received funding increases which it has used to address the income tax gap and the black economy. There has also been ongoing support for the Tax Avoidance and Phoenix Taskforces.

The intelligence-gathering work of the ATO has also increased, with tip-offs to its Tax Integrity Centre at record levels. As a result the ATO has conducted audit visits to businesses in areas where there appears to be a high level of black economy behaviour, such as not reporting transactions made in cash. The Melbourne suburbs of Frankston and Croydon, and Bega on the south coast of New South Wales have been targeted by the ATO in this program.

The high level of tip-offs might signal a social change, away from the longstanding culture of ‘gaming’ the tax rules towards the view that the system should be fair and transparent.

At another level, the introduction of Single Touch Payroll and the expansion of the Taxable Payments Reporting Systems appears to have improved compliance due to enhanced reporting.

“It is important that everyone pays their fair share of tax, no more and no less,” says Elinor Kasapidis, Tax Policy Adviser at CPA Australia. “The ATO has been signalling for some time the industries and practices where it has concerns. The latest efforts are a continuation of ongoing compliance activities to address the black economy. That has our support.”

Michael Papandrea FCPA, Director of ACT-based Papandrea Partners, sees the advances in technology and information-gathering that the ATO has made as a game changer.

“From a practice perspective we have to keep abreast of the changes under way,” he says. “Advisers have to ensure that they have the systems and training in place to consistently identify the clients who may be impacted by such changes, or areas of risk within their practice. Checklists and investment in smart software can be very useful in this.”

Tax-article-image

Issues for attention

An area that the ATO has long identified as problematic is rental income. In particular, on the deductions side, the ATO has indicated that some taxpayers claim travel expenses to visit their rental properties, while some claim expenses under repairs when they should be depreciated. There have been other cases where mortgage interest has been claimed when the property was not rented or available for rent, but was a holiday house.

Some property investors who do not use tax advisers seem to be unaware of the ATO’s data-matching capabilities, and so make claims that might not be fully compliant. This could represent at opportunity for tax advisers to increase their client base by emphasising that professional advice is now not just useful but effectively essential.

“Unfortunately, with the information available from Tax Advisor Google many taxpayers believe they are experts,” says Papandrea. “With its new AI systems the ATO has the ability to match behaviour with what is being declared. Up until now the cross-checking system has been limited. AI is closing that gap, so information will be available almost instantaneously to the ATO. This is where compliance is headed.”

Papandrea, looking towards the end of the financial year, believes that the ATO will continue its focus on GST compliance, especially GST on property transactions. Inappropriate claims on vehicle expenses or travel expenses will be another area of attention, as will debt forgiveness and trust distributions. Issues around the Superannuation Guarantee are likely to figure over the next few years, especially with an amnesty currently in place.

Kasapidis adds that the ATO has updated its information on private groups and has proposed increasing the reporting burden on high-wealth groups. There is also an ATO draft ruling on work-related expenses for non-business taxpayers which may impact some claims.

Another issue for tax advisers is the change Is the lodgement method, with the introduction of myGov ID and Relationship Access Manager. The previous ATO Portals system was the subject of criticism as lacking some functionality and not being user-friendly. While the new system might experience some teething problems the general view is that it will, over time, improve efficiencies for tax practices. However, advisers will need to ensure they are fully conversant with it before the end of the year, and that security issues such as password protection are addressed.

Looking ahead

The overall trend is that the ATO is getting smarter at ensuring compliance. Taxpayers who might be tempted to ‘sail close to the wind’ should bear this in mind, and advisers should ensure that clients understand the message.

“Advisors should have their systems and knowledge up to speed and need to ensure that they can dissect their client base to identify the risk areas,” Papandrea notes. “They need to be on the front foot. Documenting discussions and advice at every stage is critical.
“The ATO is also looking closely at tax agents who have statistically been making the highest claims. Who would want to be dealing with that? You need to protect your brand and reputation.”

In the longer term, the move towards pre-filled returns for many taxpayers will mean that the business model of many practices will have to change.

“While increasing volumes of data are being used for pre-fill, tax advisers and agents still add value in more complex areas of tax and ensuring their clients have access to the full range of concessions and deductions available to them,” says Kasapidis. “Notwithstanding this, CPA Australia has for many years encouraged members to enhance their offerings to clients and focus on value-added services.”

Papandrea agrees. “Compliance will continue to be an integral part of any accounting business if done properly,” he says. “For example, a compliance review of a client’s affairs to stay abreast of the legislative changes and risk areas is the perfect segue into identifying areas of the client’s business that may require attention. This in turn leads to broader business advice for the client and the opportunity for a practitioner to expand into advisory services.”

* See the November 2019 issue of In The Black, ‘ATO’s Chris Jordan: the man with a tax plan’, at https://www.intheblack.com/articles/2019/11/01/atos-chris-jordan-man-with-a-tax-pla

Holiday reading

Appearing in In The Black magazine, December 2019

 

The Vagabonds: The Story of Henry Ford and Thomas Edison’s Ten-Year Road Trip
By Jeff Guinn
Simon & Schuster, $40

Vagabonds book coverJumping into a car and heading for the horizon is an idea often associated with young people but it was, in fact, started by two American inventors late in their careers. Edison was the tech entrepreneur of his era, and Ford had created the first affordable vehicles. When they met in 1911 they hit it off, and in 1914 they decided to hit the road. They continued to take regular sojourns for the next decade. They did not exactly rough it, with an accompanying convoy carrying camping and cooking equipment, servants, and a chef.

They traversed the American hinterland, a nearly roadless and often impoverished setting. By all accounts they had a wonderful time. Guinn punctuates the story with vivid portraits and interesting side-trips, and it adds up to an enjoyable tale. One is never too old for an adventure.

 

How To Do Nothing: Resisting the Attention Economy
By Jenny Odell
Melville House, $49

The early promise of the Internet was about binding people together in a network of opportunities and information. True to an extent, but the darker side is the way the screen often leads to disconnection from the real world. Odell, an artist at Stanford University, believes that we will lead longer, happier, more responsible lives if we ditch the devices occasionally and spend some time doing simple things that brings us satisfaction. After all, the objective of the tech platforms is to keep us looking at the screen so they can make money. Not much of a reason for us to give them so much of our lives, really.

So hit the ‘off’ button. Take a walk, hug someone you love, listen to the world, do something slowly. These things might not sound like much, but they are everything.

How To Do Nothing book cover

 

The Future is Asian: Global Order in the Twenty-first Century
By Parag Khanna
Hachette, $23

Parag Khanna, Managing Partner of FutureMap, a scenario planning and strategic advisory firm, is very good at drawing disparate pieces of information into a meaningful picture. He collects data on trade, demography and technology to paint a picture of a rising Asia, powered along by an aspirational middle class of over two billion people.

Future is AsianToo often, he says, Western commentators think of Asia only as China and the Pacific Rim. This region is important, he readily acknowledges, but there are plenty of interesting things happening on the Indian subcontinent, Central Asia and the Gulf States. Underpinning the boom in intra-Asian trade is new-gen infrastructure, especially China’s ‘Belts and Roads Initiative’.

Of course, it is not going to be all smooth sailing. Many countries have a legacy of political instability and corruption, and others have longstanding disputes with neighbours. There are no easy solutions but, on balance, Khanna is optimistic.

 

 

Think Like Amazon: 50 1/2 Ideas to Become a Digital Leader
By John Rossman
McGraw-Hill, $40

Remember when Amazon just sold books? Now it bestrides the world, and everyone wants to know how Jeff Bezos & Co did it. Rossman was a senior Amazon executive who worked on the scalability side, so he is well-placed to explain. He offers a long list of guiding principles, ranging from developing platforms that can provide self-service growth to focusing metrics on customer relations to using AI-based technologies wherever possible.

On culture, Rossman emphasises the value of semi-autonomous teams and of constant testing and reviews. Even successful units are told to look for disruption opportunities in their area. Bonuses are given in shares and not cash.

Interesting stuff, although occasionally Rossman might have delved more deeply rather than skimming across the surface. Few companies could use all of these suggestions but most could learn from at least some.

 

The Moment of Lift: How Empowering Women Changes the World
By Melinda Gates
Macmillan, $33

As the wife of Bill, Melinda Gates could have chosen a simple life of counting money and attending parties. Instead, she – and spouse – jumped into global philanthropy, trying to focus their energy and resources where they could do the most good. For Melinda this meant working with women in under-developed countries, on the basis that they were the ones most likely to lift up their communities. She started with the idea that contraception should be readily available but soon realised that a change of mindset through education was needed.

This concept is not new but here it somehow feels fresh. Gates admits there have been times when she felt almost overwhelmed. She was only able to keep going by occasional personal successes – a “moment of lift”. It is a powerful, touching sentiment by someone who is intent on making the world a better place.

 

 

The Non-Obvious Guide to Emotional Intelligence (You Can Actually Use)
By Kerry Goyette
IdeaPress, $31

Many discussions on Emotional Intelligence quickly start to sound like feel-good fuzziness but Goyette, who was a psychotherapist before becoming a business adviser, keeps her focus on the practical. She explains how leaders can become more aware of their emotions by asking the right questions of themselves and by seeking feedback from others. This helps them to understand their own motivations and ultimately improves their decision-making.

The book has guides, tests and case studies to show how stronger EI can help a leader overcome performance derailers such as conflict avoidance and impulsivity. Once someone has improved their EI they can more easily recognise problems in others and lead them to better outcomes.

Goyette acknowledges that developing this level of self-awareness is not easy. But the gains in professional achievement and personal satisfaction make it, in the end, a worthwhile journey.

 

Outspoken: Why Women’s Voices Get Silenced and How To Set Them Free
By Veronica Rueckert
HarperBusiness, $60

Outspoken book coverSpeaking is not difficult, says communications coach Rueckert. Being heard: that is difficult. She has solid advice for women who want their voice to be heard, in both literal and figurative senses. She examines research showing how often women in the workplace are ignored due to their method of speaking, and suggests techniques on how to avoid being interrupted and how to interrupt a conversation – or monologue – successfully. She has interesting things to say about claiming physical space and asserting the right to speak without being aggressive.

Rueckert, who is a trained opera singer, also tackles the mechanics of voice projection, including useful exercises to help transcend “cubicle voice”. Her tone is encouraging and supportive, and sometimes funny. But she never loses sight of her serious point: that liberating the female voice is a key to liberating the self.

 

Loonshots: How to Nurture the Crazy Ideas That Win Wars, Cure Diseases, and Transform Industries
By Safi Bahcall
St Martin’s Press, $27

Bahcall is a physicist who specialises in a field called phase transitions, such as when water turns to ice. He believes that this explains a wide range of shifts, from voting to the flocking of birds. A series of small structural events tip each other into a cascade.

The main thrust of this book is how phase transition fuels innovation, especially at the leading edge of possibilities. Bahcall presents plenty of examples in science and business, and finds a common thread of ideas being transferred between (apparently) unrelated fields by eccentric individuals. A once-crazy idea suddenly looks plausible, even inevitable. This is uncommon in large organisations, although they can compensate by establishing quasi-independent units of creative mavericks.

Bahcall believes that this area will be a key driver in the next decades. If his enthusiasm is an indication, he might be right.

Loonshots book cover

Building negotiation skills

Appearing On In The Black Digital site, October 2019

 

Everyday, we act as negotiators. But we seldom think about the skills required or the processes we must follow to negotiate successfully, according to Chas Savage, CEO of Ethos CRS, a company that specialises in customised capability training in communications, regulation, policy, and leadership. In his CPA Congress address, ‘Mastering Negotiation Skills’, he examines the requirements of successful negotiations, especially in business.
“The negotiating process is about how you can create and increase value,” he says. “Ideally, it involves a conclusion that involves everyone walking away satisfied.”
There are two types of negotiations. The first is transactional. One side gains while the other side loses, at least in the short term. The zero-sum nature involved means that this type of negotiation is not well-suited if there has to be a long-term relationship between the parties.
The other type, collaborative negotiations, is one in which both sides maximise their gains and minimise their losses, because they work to realise common objectives.
negotiation“It is important that you don’t mistake one for the other,” says Savage. “Any negotiation requires clarity of mind – and a lot of homework. You must understand what the other side wants, both the practical elements and the psychological needs. Yes, negotiation is a form of manipulation, but that does not mean that it cannot work out to the benefit of both parties.”
As an exercise, Savage asked the audience to put themselves in the position of the North Korean negotiators dealing with the US team and President Donald Trump, trying to reach an agreement over nuclear weapons. This helped to understand how to assess the needs of those on the other side of the table.

Planning needed

Much of the hard thinking has to be done even before negotiations begin. What is your real objective? What are you willing to do to achieve it? What do you think the other side is trying to achieve, and what will they give up? What is the anticipated outcome, your minimum acceptable outcome, and your ideal outcome? Is no deal better than a bad deal?
A critical part of this is knowing what you will do if negotiations fail. This is called the Best Alternative To a Negotiated Agreement, or BATNA. The key is to establish and expand the areas of agreement. This is the Zone of Possible Agreement, or ZOPA. The larger the ZOPA the more the two sides will seek to collaborate.
“Business negotiations are generally done by teams,” Savage notes. “And everyone in the team must know what their role is and who is leading the team. The last thing you want is your own people contradicting each other or not having required information to hand. The good cop/bad cop tactic, where one member of the team makes extreme demands and another one offers a more moderate position, can be useful, but everyone has to know exactly what they are doing.”
Depending on the nature of the negotiations, it can be very useful to conduct a test run, with an ‘opposing’ team. Gaming can reveal potential problems and weaknesses, which can be addressed before the real thing starts.

Tactics and trust

Good preparation makes for good negotiations but across-the-table tactics are also crucial. A solid start is to cite standards, precedents, and the benefits of an agreement. This will provide a framework for discussion. From here, it should be possible to divide the negotiations into small steps, to minimise risks and misunderstandings. However, there has be a clear focus on the overall objective, and disputes on unrelated issues should be closed down immediately.
“There needs to be an element of trust,” says Savage. “That doesn’t mean you have to like each other. It just means that you have to know the other side can and will deliver on their commitments, and they know that you can and will deliver on yours.”
A useful idea is to draft an agreement document as soon as possible in the process, to give discussions a focal point. But ensure that there is only one copy in circulation at a time. The two sides having different documents is a recipe for conflict, and an undermining of trust. Do not, Savage emphasises, allow the other side to draft the document.
“In the closing stage, look for things like fading counter-arguments, body language suggesting fatigue, and converging positions,” he says. “The end is then in sight. Once there is an agreement, follow up promptly on the commitments you have made.”
Savage makes the point that the negotiation process can be intellectually and physically demanding. Complex negotiations require a high level of concentration over an extended period.
“Make sure you are healthy and relaxed,” Savage suggests. “There should be planned time and resources for rest and recovery. It’s hard work, after all.”

AAT minefield

Appearing in In The Black magazine, November 2019

 

Registered tax agents should think carefully before representing a client on a tax dispute at the Administrative Appeals Tribunal, as many of the rules are unclear and the issues are poorly-defined. It is entirely legal for accountants to appear for a client at the AAT – in fact, the Tax Agent Services Act expressly allows registered tax agents to do so – but that they can does not automatically mean that they should.
According to figures provided by the AAT in its submission to the review of the Tax Practitioners Board, last year about 30 per cent of people who took a tax dispute to the AAT were represented by their accountant/tax agent, or 198 of the 316 cases in the Taxation and Commercial Division. In the other cases, the appellant was represented by a lawyer.
The AAT is not a court but an administrative body that reviews specific decisions of other government agencies, including the Australian Tax Office. It considers whether, on the facts presented to it, the correct or preferable decision was made in respect of the applicable law, rules and government procedures. Its own decisions are judicially reviewable.
Despite the administrative status of the AAT, many issues put before it involve questions of statutory interpretation and close reading of rules. This raises a critical question for accountants: where is the line that separates appropriate tax advice to a client from unqualified legal advice?
Melbourne barrister and part-time Deputy President of the AAT, Frank O’Loughin QC, notes that when tax agents present cases in the AAT on behalf of their clients they are involved in work that includes both legal and factual elements.
“Applying taxation laws to the facts of a taxpayer’s case is always legal work,” he says. “Registered tax agents are permitted to represent their clients in undertaking this work. Different aspects of Australia’s tax system call for deployment of different types of skill and knowledge. Some aspects of the work in the AAT lend themselves to the skills of accountants, others lend themselves to the skills of lawyers. Other aspects are common to both.”

Safe harbour

The TASA provides a ‘safe harbour’ for registered tax agents against the prohibition on legal advice. This is a provision in a law or regulation that affords protection from liability or penalty under specific situations, or if certain conditions are met. The safe harbour concept is used in several areas of law, including taxation.
Stormy harbourA difficulty is that it applies only when an accountant is doing the ordinary, ‘bread and butter’ work of an accountant, including advising on general Commonwealth tax issues.
Chris Wallis, a barrister who has published a number of articles on the subject, believes that many accountants do not really understand the limits of the ‘legal advice’ safe harbour. He also questions a key decision known as the Felman Bubble.
The Felman Bubble concept is derived from the decision in Felman v Law Institute of Victoria [1998] 4 VR 324; (1997) 142 FLR 383, where Kenny J said [at pp.383-4]
… a tax agent who gives advice, as to income tax matters … does not give what is ordinarily understood as legal advice …

“Accountants have long believed that they are entitled to give advice, including legal advice, about the operation of the tax laws more generally,” he says. “But there is no legal basis for this belief, even if the advice is provided in relation to the preparation and lodging of a tax return.”
Wallis cautions that the Felman Bubble does not extend to work in relation to state taxes or superannuation (other than in the context of income tax).
He sees no real difference between ‘engaging in legal practice’ and providing legal advice, a distinction sometime made in the literature and legislation. He believes that accountants’ training simply does not extend to commercial law, legal personality, equity or rules of evidence.

Issues with TASA

John Morgan, a Melbourne barrister highly experienced in the tax field, likewise sees the weakness of the Felman decision, and argues that a registered tax agent must know not only the tax law but the general law as well, and so must have comparable skills to a legal professional.
“Tax agents are allowed to give ‘advice’ about ’taxation laws’ because it is a ‘tax agent service’ under s90-5(1)(a)(ii) of TASA 2009, and a Federal law overrides the State and Territory laws that prohibit unqualified legal practice,” he says. “Whether this protects non-lawyers from any advice they give that culminates in a tax liability has not apparently been not tested. It may be that a Court would ‘read down’ the TASA protection, in cases where the ‘public interest’ was not served, because of the complexity of the general law.”
There is also the possibility that the TASA may be unconstitutional in attempting to give non-lawyers the right to ‘give advice’ on general law matters, or on ‘liabilities under taxation laws’, at all.
“In any event, registered agents must comply with the TASA requirements, including the Code of Conduct,” Morgan notes. “This includes an obligation to do this, amongst other things, ‘competently’. Often this will be difficult without legal training.”
Morgan also points out that providing legal documents to a client is fairly clearly outside what tax agents are permitted to do. A breach of the Code of Conduct can lead to disciplinary action by the TPB, resulting in suspension or cancellation of registration.
There is also legislation in each state and territory that prohibits an unqualified, uncertified person from engaging in legal practice, and substantial penalties are involved, with similar carve-out arrangements impacting accountants.
And just because a matter relates to tax does not mean that it qualifies for the carve-out: it can depend on the particular circumstances of a case.

Serving the client

Another issue that Wallis raises is the potential for accountants to unwittingly engage in legal practice when they choose to represent a client at the AAT. He believes that many accountants who go to the AAT do not understand the breadth of the issues that can arise and whether the Felman Bubble, while it applies to the representation in the hearing, can be stretched to the research and other work required to prepare for the hearing.
“An accountant before the AAT is almost always appearing to defend a client in relation to work undertaken by the accountant,” he says. “If the accountant submits that the client had provided everything that was needed the accountant has implicitly advised on evidence rather than tax. Similarly, if the accountant concludes that the client did not provide everything that was needed they are advising on evidence.”
He also takes the view that it might be appropriate to require registered tax practitioners to undertake relevant continuing professional development in this area to qualify for the safe harbour provisions.
John Morgan emphasises that in the objection process there is a need to inform the client of the available options, including independent advice, representation by a lawyer and the choice between the AAT and the Federal Court.
“Strange as it sounds, there have been accountants who go to the AAT without their client’s knowledge,” he says. “Perhaps they are trying to defend a mistake they have made. In any case, it is hard to see that it meets the standards of the Code of Conduct.”
Chris Wallis emphasises that the protective strength of the Felman Bubble, which applies in Victoria but not necessarily in other states, is untested.
“From a tax practitioner’s point of view, a prohibition without a bright line test is a disaster waiting to happen,” he says. “The lesson is: if you go to the AAT, be very sure about the scope of the task you are undertaking and why you are doing it.”

Realistic assessment

Accountants who appear at the AAT should be aware of the indemnity issues, although Director of Fenton Green, CPAA’s Insurance Broking partner notes that not all PI Policies provide complying cover for accountants. “The Professional Indemnity policy coverage needs to provide cover for CPA By Laws as well as all usual professional activities an accountant would undertake. That would include going to the AAT for a review.”
He goes on to suggest that accountants representing their clients at the AAT should keep clear records relating to verbal advice and always reiterate verbal advice in writing. “Do not stray from providing factual and verifiable accounting advice for taxation and bankruptcy,” he says. “Peripheral and personal advice should be highly avoided.”
Deliberately committing an offence invalidates the policy through a ‘fraud and dishonesty’ exclusion. There is a ‘write back’ provision for innocent partners in a practice.
Fenton advises that taking a case to the AAT can involve significant time and effort.
“This decision really needs to be made jointly through consultation between accountant and client,” he says. “Part of that discussion should be to identify the possible benefits as well the chances of success. You have to be realistic in your assessment.”

Checking the checkers

Appearing in In The Black magazine, October 2019

Auditing faces an uncertain future

Independent auditing has long been one of the foundation-stones of business but the profession, in Australia and globally, is facing unprecedented challenges – as well as emerging opportunities. No-one can say with certainty where the path is leading but there is a sense that auditing as a profession and a process is under pressure.

Much of the current concern has been driven by events in the UK, after a series of business collapses, most notably the BHS and Carillion failures, following sign-off of the accounts by one of the Big Four audit firms – PwC, KPMG, EY and Deloitte. Regulators are now pushing the firms to clearly separate the audit and non-audit services they provide to clients, even to the extent of splitting off a separate company.

Speaking recently to a UK parliamentary committee, the heads of PwC, KPMG, and EY indicated that they would cease providing non-audit work for large audit clients within a year. PwC UK has been the first to make serious moves in this area, announcing in June that it will have one business to focus on external audits and another to deal with internal audits and issues such as cyber-security and technology risk. It also plans to recruit more than 500 auditors, introduce new training and technology initiatives, and increase the number of specialists in its audit quality control section. This will cost about £30 million a year, which is a good indication of the seriousness of the issues.

“Globally, the UK is leading efforts to improve Auditing 2audit quality and avoid conflicts of interest,” says Professor Ian Gow, Director of the Melbourne Centre for Corporate Governance and Regulation at the University of Melbourne, and co-author of the book The Big Four: The Curious Past and Perilous Future of the Global Accounting Monopoly*. “But in South Africa, India, and Ukraine, there have also been cases of Big Four firms being excluded from audit work due to sloppy practices.”

This raises the question of how auditing is faring in Australia, especially since the Big Four handle audits for over 90 per cent of the companies listed on the ASX. It appears that, generally, the situation does not directly compare with the UK. A survey recently released by the Auditing and Assurance Standards Board, Audit Quality in Australia: The Perspectives of Professional Investors, found that 93 per cent of respondents indicated that they saw audit quality as “average” or “above average”.

Related to this, a Financial Reporting Council survey, Audit Quality in Australia: The Perspectives of Audit Committee Chairs, revealed a high degree of satisfaction with the quality of external auditing, with 92 per cent of respondents rating them “above average” or “excellent”.

“We were very pleased to see these results but we can never be complacent,” says Matt Graham, Managing Partner, PwC Assurance. “For some time we have felt that the audit quality debate in Australia could be broader, more balanced and aided by increased transparency. This is why we released the country’s first-ever balanced scorecard on audit quality recently. That scorecard showed audit inspection results along with other key measures of audit quality such as internal inspection findings, restatement rates and adjustments to financial statements. We plan to release data like this on an annual basis.”

The corporate regulator supports greater transparency and is considering whether to publish individual firm inspection results in its next public report. ASIC is also continuing work on possible additional audit quality measures to complement inspection findings. Doug Niven, ASIC’s senior executive leader, financial reporting and audit, notes that ASIC’s audit inspection report for the 18 months to 30 June 2018 found that in 24 per cent of the key audit areas that were reviewed auditors did not obtain reasonable assurance that the financial report was free of material misstatement. This is slightly better than the figure of 25 per cent for the 18-month period ended 31 December 2016.

“Sustainable improvement requires a focus on culture and talent in firms,” says Niven. “Our inspection findings suggest that further work and, in some cases, new or revised strategies are needed.”

But he is wary about splitting large accounting firms into audit-only firms, believing that it could adversely affect audit quality.

Graham notes that PwC in Australia has no plans to hive off its audit business (and none of the other big audit firms have signalled intentions to do so). He sees the business and regulatory environments in the UK and Australia as very different, and believes that the discussion in Australia should be more broadly aimed at audit quality, independence, conflicts of interest, and the needs of businesses and their shareholders.

Professor Gow is pleased to see moves like PwC’s scorecard although he wonders where it will lead. He notes that all of the Big Four firms have recently started to reveal new information. “Clearly the incentives to reveal more are stronger if your numbers look better,” he says. “I suspect that this wave of disclosure will prompt some tweaks to the inspection process to make the numbers more meaningful. An issue with the reported numbers is that audits are selected for inspection because they are perceived to be ‘risky’ audits, which makes it difficult to draw general conclusions. But overall it seems to be a healthy conversation to have.”

Focus shift

Discussions on ways to improve audit quality are important but there is an even more crucial question: in the current environment, what is auditing actually for? In an era when Big Data allows for real-time tracking of all of a company’s transactions, does the idea of checking and re-checking historical financial data make sense anymore?

Auditing 1Professional investors and audit committee chairs may be reasonably satisfied with the work of auditors but there are other stakeholders in the mix as well. There is certainly a bloc of investors who are concerned with a company’s non-financial performance as well as the traditional metrics.

While Big Data has the potential to take over many of the mechanical, repetitive tasks associated with auditing it is likely to push the profession into non-financial fields and towards predictions and business analysis.

Matt Graham says: “The industry has to evolve the audit in line with market demands, as well as engaging more effectively with stakeholders along the way. For example, should an audit include new levels of coverage such as fraud, going concern and cybersecurity? Could it provide assurance over non-financial measures such as culture, sustainability and the control environment? Should it look forward as well as back and provide comfort over forecast information?”

In this context it might be noted that the Australian Accounting Standards Board and the Auditing and Assurance Standards Board recently released a Practice Statement, Climate-related and Other Emerging Risks Disclosures: Assessing Financial Statement Materiality. The Practice Statement is not mandatory but it points auditing towards an integration of financial and non-financial data.

A key problem with this is that auditing financial statements is largely about providing assurance that the statements were prepared in accordance with accounting standards. When auditing begins to look at issues such as the environment, fraud and cyber-security there are no widely-accepted standards that can be used to assess and check performance, and even if there were it is not clear that understanding accounting standards provides a basis of relevant expertise.

“The Big Four firms are definitely trying to claim a future stake on auditing things such as sustainability, environmental risks, and even privacy,” says Professor Gow. “But skills-wise it is a real stretch. Auditors still graduate with accounting degrees that focus on standards and the like. The auditor of the future is likely to be someone who is comfortable with advanced data analytics.”

Doug Niven counsels caution about moving too quickly into the non-financial field. “Investors and other users of annual reports may benefit from independent assurance over non-financial information in an operating and financial review, integrated reporting, sustainability reporting and climate change reporting,” he says. “But at present, there are no detailed reporting frameworks to audit against and many of those promoting innovation by companies in non-financial reporting suggest that independent assurance is premature.”

Competition pressure

Another issue relates to competitive pressures. Professor Gow points to his current research showing that audit fees generally increase slightly over time, and then often decline markedly when a new auditor is appointed. This suggests that some audit appointments are based on price.

“This could be a concern,” he says. “I suspect that the Big Four would rather compete on quality. The problem is that audit quality is very difficult to measure, so it is hard to prove that you are adding sufficient value to justify the costs.”

There is also the possibility that competition may come from smaller, more nimble firms that can offer quasi-auditing services in non-financial areas.

So what might the future of auditing look like in Australia? In short, while financial review is likely to remain at the essential core of auditing practice it might cease to be the reliable source of revenue that it has long been for the large firms. Regulators and stakeholders are likely to demand greater division between audit and non-audit functions, although pressure for complete separation is unlikely. Auditing firms will have to go further into non-financial issues, requiring a significant change in corporate culture. At the same time, they will face increasing competition from new entrants, especially in fields such as the environment.

“One is always hesitant when trying to predict the future, as so many past predictions turned out to be wrong,” says Professor Gow. “But one thing is clear: it’s going to be a very different profession from what it is now.”

 

* The Big Four: The Curious Past and Perilous Future of the Global Accounting Monopoly by Stuart Kells and Ian Gow (LaTrobe University Press, 2018). This book won the 2018 Ashurst Australian Business Literature Prize. A copy of the book is available at the CPA Library.

https://www.auasb.gov.au/admin/file/content102/c3/InvestorSurveyReport.pdf [Audit Quality in Australia: The Perspectives of Professional Investors]

http://www.frc.gov.au/documents/publication/audit-quality-in-australia-the-perspectives-of-audit-committee-chairs   [Audit Quality in Australia: The Perspectives of Audit Committee Chairs]

https://download.asic.gov.au/media/4990650/rep607-published-24-january-2019.pdf [ASIC Audit inspection program report for 2017-18]

https://download.asic.gov.au/media/1338902/info184-published-19-August-2013.pdf [ASIC Information Sheet – Audit transparency reports]

https://www.auasb.gov.au/admin/file/content102/c3/AASB_AUASB_Joint_Bulletin_May2019.pdf [Australian Accounting Standards Board and Auditing and Assurance Standards Board Practice Statement]

Teams provide energy boost

Appearing on In The Black Digital website, September 2019

Red Bull carves an unorthodox path

Many companies are not gaining the efficiencies and productivity levels they hope for from their teams, because their focus and resources are not invested in the right places. Even the most advanced tools and systems tend to fail if the underlying processes do not work as designed; and even the best processes will fail if people responsible for them do not perform their work with integrity.

To avoid this common pitfall, energy drink company Red Bull has been taking inspiration from the work they do with elite athletes, and translating these learnings into “traditional” departments, such as Finance in North America.

“We are using proven methods of driving the performance of our teams and to help our colleagues be at their best every day,” says Tomasz Nowakowski, Vice President – Finance, Red Bull Distribution Company. “When we say ‘high-performance teams’ we don’t mean any special kind of structure or membership. Our approach is based on making the existing teams across the organisation as effective, efficient, and focused on achievement, as possible.”

Looking for mindsetTomasz Nowakowski

Everything starts at the recruitment stage. The company looks for what Nowakowski calls a ‘growth mindset’, a concept popularised by Dr Carol Dweck. Technical skills and relevant functional experience are important but right attitude is really the key.

“We look for diversity of thought. New ideas and approaches are crucial for responding to long-term challenges. Where we look for cohesion is around our leadership code and values, which are Professionalism, Responsibility, Passion and Focus,” he says. “We expect that everyone we hire embraces those core values. Authenticity is at the heart of our leadership code, and that facilitates people being more direct with each other.”

Team leaders are encouraged to assume positive intent and not take themselves too seriously. That reduces many misunderstandings and helps the faster resolution of internal conflicts.

Another concept embraced by Nowakowski’s team is Shin Gi Tai, which comes from Eastern philosophy and is followed by many martial arts practitioners. It represents a unity of body, mind and skill.

“I was first introduced to it when we had a training session at Machida Karate Academy in Los Angeles,” he explains. “We learned that having the highest level of skill or the best technique is usually not enough to win consistently. Our body needs to be taken care of well. The competitor must be healthy and adequately conditioned in order to be able to use their skills. In the end it is strong mind and spirit that will drive the fighter to keep pushing and never give up.”

Translating this into the workplace means showing employees how to take care of their health and physical wellbeing. Nowakowski connects this to the strong mind, grit and mindset that the company seeks and expects from its people. These qualities are also fostered through the company’s senior management, who are expected to lead by example.

Dealing with adversity

Of course, there are always unexpected setbacks. The issue is how the organisation and its people respond to them.

There is an important concept Nowakowski learned from one of world’s leading experts in this field, Dr Eric Potterat, called ‘adversity tolerance tactics’. Human beings often respond to setbacks or highly stressful situations with our primal ‘fight or flight’ mechanism. This makes them lose conscious control over their performance.

Everyone has a way of dealing with adversity but there is no single method that can guarantee that people can continue performing at a high level after a major reversal. Nowakowski says: “I learned from Potterat that high-performing teams, such as special forces and professional sports teams, tend to use sets of multiple tactics. These range from pre- performance and post-performance routines, meditation, and visualisation, to more advanced tools such as compartmentalisation and a very high degree of self-awareness.”

He believes that by knowing, combining and understanding these tactics, people can begin to incorporate them into their personal battles, which will improve performance, step by step.

Results on the board

Nowakowski believes that the company’s approach to team-building underpins the speed with which it has been able to take over energy drink sales and distribution in a new markets in the US.

“Many of our expansions would not be remotely possible in the timeline they happened in if our teams did not operate with growth mindset. It’s almost in our DNA right now,” he emphasises.

“Red Bull is not just a consumer packaged goods company but a powerful brand involved in the media world and in various global sports, including football, Formula 1, Moto GP, World Rally Championship and many others. The brand is our asset, and it has been our teams and the culture we have developed that have driven it forward.”