Is it ethical to self-insure?

Tax audit protection is not mandatory for accounting professionals and some prefer to self-insure – putting money aside to pay the costs should they or a client ever come under the spotlight.

Offering tax audit protection to clients takes the pressure off should they ever be targeted by the ATO. It also sends a clear message that you’re putting their needs first.

By Beth Wallace

As the Australian Taxation Office (ATO) continues to escalate its compliance activities with the aid of sophisticated data analytics, it’s no wonder many accounting practices are safeguarding themselves with tax audit protection solutions.

Yet despite its obvious benefits, tax audit protection is not mandatory for accounting professionals and some prefer to self-insure – putting money aside to pay the costs should they or a client ever come under the spotlight. Others may rely unwittingly on “junk insurance”, in which clients fund the insurance, but the risk is not actually transferred to an insurer.

For Roman Kaczynski, director at Accountancy Insurance, self-insurance not only represents a commercial risk for accounting firms, but also threatens to compromise client relationships.

“Considering a non-conventional tax audit insurance solution, such as self-insurance, puts accounting firms in direct conflict with clients,” he says. “In essence, self-insurance indicates [to clients] that accountants do not believe a real need for tax audit protection exists.”

Why it pays to be prepared for audits

In the 2017/18 financial year, the ATO interacted with over one million taxpayers in relation to their claims and undertook about 120,000 audits of small businesses alone.

Such exercises are an imposition on an accounting practice’s time and financial resources, with Kaczynski estimating that audits cost anywhere between A$750 and A$15,000 for GST cases, and up to A$20,000 for employer obligation matters – encompassing consulting hours spent resolving the audit, administrative costs and various other expenses.

With a proven tax audit protection offering in place, accountants are reimbursed for their time, which means they don’t need to pass on additional fees to their client. “It provides the support and reassurance that the accountant can truly put in all that is needed and employ third-party professionals if it is necessary,” Kaczynski says.

The dangers of self-insuring

It might seem like a cost-effective option, but self-insurance presents several risks. First, a practice could be audited before it has gathered sufficient funds to pay the expenses, or be subjected to more audits than anticipated within a short timeframe. In such cases, the practice may need to take a financial hit by not being compensated for their time. 

Kaczynski adds that there are also compliance issues to consider. “The firm is at risk of either potentially acting as an insurer in breach of the Insurance Act and the Corporations Act, or at the very least they are ignoring the possibility for it to be still a financial product,” he explains. “It is ultimately the accounting firm that will be held to account for non-compliance. The true test comes when there’s an issue with a client, at which point explaining your decision to self-insure will not seem as simple as it does when the scrutiny is not so great.”

Moreover, the profit motivation behind self-insurance calls into question whether practices that choose this model are acting in their clients’ best interests. Given that CPA Australia members are bound by the APES 110 Code of Ethics, Kaczynski encourages accountants to ask themselves whether the threat of self-interest is leading them to choose the cheap option, rather than the right one. 

“With a proven tax audit insurance offering, accountants are able to focus solely on what is best for their client, maintain their integrity and uphold their client relationship,” he says. “Why risk that on an unproven and untested solution?”

Visit Accountancy Insurance to find out more about tax audit protection for your practice.

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October 2021
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