Not every client is a good client, and the consequences of working with them could be severe.
By Zilla Efrat
American business magnate and billionaire Warren Buffett once said you can't write good contracts with bad people. His advice, directed at insurance companies, also applies to tax practitioners.
Those who accept what a client says without question or reasonable care – or worse, turn a blind eye to potentially improper practices – are liable to a range of adverse claims and reputational damage.
Further, as a recent court case demonstrated, the risks have heightened, with the Fair Work Ombudsman taking action against a Melbourne-based accountant for being an accessory to a client’s breach of labour law.
Make the rules clear
On 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 themselves become subject to legal breaches.
“External business advisers need to understand that they must put compliance with the law above their own personal interests – or face serious consequences,” she warned.
“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 broker 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.”
Instead of accountants asking clients to just hand over information, Fenton believes more qualification is needed; namely, to ensure that it is appropriate and correct.
Although the Tax Agent Services Act requires that accountants show “reasonable care” in dealings with clients, relying on the information a client provides does not necessarily imply negligence.
Judge your clients
“It depends on who the client is, the relationship, facts and history [known] about the client,” says McCann Financial Group principal Phil McCann FCPA.
Similarly, Gavin Swan CPA, director Absolute Accounting Services, says: “The key is in knowing the client. I have clients that provide me with information and I trust them implicitly, but it’s usually taken years to build that relationship.
“When you have a new client or a client who goes into business with another [individual or entity], it’s a completely different ball game.”
Swan and McCann believe every set of facts should be examined on merit. But how far should you go to ensure client information is correct?
McCann Financial Group recommends to routinely:
- seek receipts or documentation
- consult the Australian Taxation Office (ATO) ‘pre-fill’, which is third-party evidence
- obtain other third-party evidence, such as bank statements
- consider materiality – how big are the numbers involved in the claim?
“Checklists are also a vital tool,” McCann says. “Ask each and every client 60 questions to open the dialogue, and put on record the fact you have asked those questions.”
Likewise, Swan believes it’s all about getting back to basics and asking lots of questions. For example, look at last year’s information to find out if and why there has been significant change.
In the case of a new client, you can seek ethical letters and copies of previous years’ information, to establish if the client is ‘opinion shopping’ or moving between advisors to circumvent questions about their affairs,” adds Josephine Haste, CPA Australia’s manager for quality review education.
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Check and re-check
He also advises verifying titles to rental properties, cars or loans.
“It’s amazing how often we are told one thing – ‘Mr Smith’ claims to own a property – but we find something else from the title or bank. For example, a company [might] actually own the property. Don’t always rely on hearsay or what the client tells you.”
“Be analytical,” Swan adds. “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 [even if cursory] to check payslips.”
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 ground rules with clients and, perhaps, reminding them that you rely on them to provide correct and appropriate ongoing information.
Related resources: Client engagement documents from CPA Australia (log-in required)
“Software programs like MYOB and Xero should reduce the risk to the accountant of inappropriate behaviour and secrecy on behalf of clients,” he maintains.
Blatant red flags include clients with a history of moving accountants, those who provide figures but no documentation and, of course, cash businesses.
For further guidance, all accountants should look at APES 305 Terms of Engagement, APES 220 Taxation Services, and APES 325 Risk Management for Firms.
In addition, where there might be concerns about issues that could have serious consequences, there is a new section of the international ethics standard for auditors and other professional accountants APES 110 Code of Ethics for Professional Accountants, responding to Non-Compliance with Laws and Regulations (NOCLAR), which became effective 1 January 2018.
NOCLAR allows accountants to speak out without breaching confidentiality principles if they suspect illegal activity under its new ethical guidelines.
Unfortunately, at the end of the day it needs to be recognised that not every client is a good client providing truthful information.
Accordingly, McCann advises: “Gently let them know the importance of the declaration they sign on their tax returns. Require hard evidence receipts and documentation. And if it gets bad enough, tell the client to find another accountant.”
Ethical help is at hand for those grappling with client confidentiality