In an era of heightened scrutiny from regulators, accountants and tax practitioners need to have a handle on their duty of reasonable care. Here are some steps you can take.
By Zilla Efrat
Warren Buffett once said you can't write good contracts with bad people. This advice, directed at insurance companies, also applies to accountants and tax practitioners.
Those who take a client’s word without questioning it or exercising reasonable care, or who turn a blind eye to questionable practices, leave themselves liable to a range of claims and to reputational damage.
The risks have also heightened, as a recent court case shows. Here, the Fair Work Ombudsman (FWO) took action against a Melbourne accountant for being an accessory to his client’s breach of the labour laws.
After winning the case, Acting Fair Work Ombudsman Kristen Hannah noted that advisers must explain the rules to their clients, make it clear when they are in danger of breaking the law and not become involved in breaches of the law themselves.
“External business advisers need to understand that they must put compliance with the law above their own personal interests – or face serious consequences,” she said.
The era of heightened scrutiny from regulators
“This is the first time I am aware of a regulator bringing an action against an accountant, but it certainly won’t be the last,” says Drew Fenton, managing director of insurance brokers Fenton Green and Co.
“My view is that other regulators, including the Australian Securities and Investments Commission [ASIC], will start looking at this a little more closely.”
So instead of accountants asking clients to just hand over information, Fenton believes that going forward, more qualification could be needed – that is, ensuring that it’s appropriate and correct information.
What is reasonable care?
The Tax Agent Services Act requires you to show reasonable care in your dealings with clients. Yet, relying on the information a client provides doesn’t necessarily mean you are exercising reasonable care.
“It depends on who the client is, what relationship you have and what facts and history we know about the client,” says Phil McCann FCPA, principal at McCann Financial Group.
Similarly, Gavin Swan FCPA, a director at Absolute Accounting Services, says: “The key is knowing the client. I have clients that provide me with information and I trust them implicitly. Usually, it’s taken years to build up that relationship.
Related resource: CPA Australia's webinar on understanding the TASA Code of Professional Conduct
“But when you have a new client or a client who goes into business with another client, it’s a completely different ball game.”
Both accountants believe that every set of facts should be examined on its own merits.
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How do you ensure client information is correct?
McCann recommends that you routinely:
- Seek receipts or documentation
- Consult the ATO “prefill”, which is third-party evidence
- Seek other third-party evidence, such as bank statements
- Consider materiality – how big are the numbers involved in the claim?
are also a vital tool here,” McCann says. “Ask each and every client 60 questions to open a discussion and dialogue, and to put on record the fact you have asked all those questions.”
Likewise, Swan also believes it’s about getting back to basics and asking lots of questions – for example, looking at last year’s information and finding out why there’s a significant change.
He also advises verifying things like the title to rental property, cars or loans.
“It’s amazing how often we are told one thing – for example Mr Smith owns the property – but find out another from the title or bank – for example, a company actually owns the property. Don’t always rely on hearsay or what the client tells you,” says Swan.
“Also, be analytical. Why does the client drive a late-model Mercedes if his or her taxable income is only $20,000 a year? On a smaller scale, it is handy to check [even if cursory] payslips.”
Letters of engagement and other documentation
Swan says the best place to begin is by investing time in getting as much information as possible when you have a new client sitting in front of you or when there are big changes in a client’s life.
Fenton agrees, adding that the letter of engagement is a great starting point for laying the ground rules with your client and, perhaps, remind clients that you rely on them to provide you with correct and appropriate ongoing information.
Fenton adds: “Software, and programs like MYOB and Xero, should also reduce the risk to the accountant of inappropriate behaviour and secrecy on behalf of their clients.”
Red flags to watch out for include clients with a history of moving accountants, clients who provide figures but no documentation and, of course, cash businesses.
For further guidance, they recommend looking at APES 305 Terms of Engagement, APES 220 Taxation Services, and APES 325 Risk Management for Firms.
In addition, if you have concerns that could have serious consequences, there’s a new section of the APES 110 Code of Ethics for Professional Accountants, responding to Non-compliance with Laws and Regulations (NOCLAR), which becomes effective from 1 January 2018.
But at the end of the day, not every client is a good client. If you fear a particular client is not providing truthful information, McCann advises: “Gently let them know the importance of the declaration they will sign on their tax returns. Require hard evidence receipts and documentation.
“And if it gets bad enough, tell the client to find another accountant.”
Tax risk management FAQs from CPA Australia