Shades of grey
When a client does something that is not strictly against the law but is ethically questionable, how does the accountant know they are fulfilling their professional obligations? The answer is much greyer than you may think.
You have a business client. It’s a small Thai takeaway restaurant in a suburban shopping centre. You find out that they keep their transactions as ‘cash only’ to avoid paying tax. Then you find out that the client is trying to keep as much money as they can so they can support their family, because they are paying a lot of money out of their pocket for visas so they can continue running the business.
As their accountant, what would you do? Do you report the situation to the regulators or do you turn a blind eye? Such was the predicament of Duca Advisors founding director Daniel Moore. While the client wasn’t breaking the law, they were also not fulfilling their tax duties as a small business.
As well as finding out they were paying everything in cash, he found out the manager was working over 60 hours per week, and that the business wasn’t declaring much, if any, wages at all. Mr Moore also found that it led to greater difficulties in working for the client’s best interests.
“As I asked more ethical questions of the business, I got better information from them as that’s what happens when you’re an accountant. You’ve got to be a bit of a detective sometimes,” he says.
“I said to them, ‘The first issue is you need workers’ compensation. If your husband is the one that’s taking care of you whilst you’re here studying on your visa, or if something happens to him on the way to picking up something, or he cuts his hands while at work, there is no coverage there’.
“Unfortunately, the first thing that happens with a lot of these small businesses is they can easily turn around and point the finger at the accountant, and say, ‘Oh, you should’ve told us. You’re in a position of knowing’.”
As a result, Mr Moore believes the onus shouldn’t fall on accountants to educate small businesses around their obligations when holding an Australian Business Number (ABN). He has found that many people go out and get an ABN and start working straight away, with no idea as to their tax obligations and fall into trouble when they’re found out 18 months down the track.
“Then they’ve got all these questions, or 12 months down the track they’ve earned $150,000 and they owe a whole massive amount of tax. They’ve made money and they’ve spent it and they haven’t paid a single cent in tax or GST. It’s really hard for a business to recover from that,” Mr Moore said.
“They may have had a great financial year, but then they owe $30,000 in tax that year. Then that means in year two they’ve got to pay double tax – last year’s and this year’s tax.
“It then falls on the accountant to fix that up and they’re the one that gets told, ‘Why didn’t I know about this earlier’. It creates a disconnection – an asymmetry of information.”
Ethical dilemmas on the rise
With so many other accountants out there with similar small business clients, it is safe to say that Mr Moore’s situation is hardly unique. This is not lost on the Institute of Public Accountants general manager of technical policy Tony Greco who has noticed a spike in the number of accountants experiencing ethical dilemmas.
“That could mean one of two things; either they are more exposed to those types of issues, or they’re more conscious of their responsibilities,” Mr Greco says.
Another common dilemma, according to Mr Greco, is family break-ups, where the accountant might be acting on behalf of both the husband and wife and, through a separation, they can no longer represent that party. Other situations on his radar include related party transactions in relation to a business, or when the accountant himself is involved in the business and their independence is in question.
Even though Mr Moore in his situation had asked more questions of his Thai restaurant client, Mr Greco acknowledges that sometimes the accountant doesn’t “want to go there”.
“There’s a bit of pressure on the practitioner to bend their practices and somewhat succumb to the client’s request,” he says.
“They don’t want to ask the pertinent questions, and sometimes they see that as a way out. For example, they might know the client has got other income, cash not reported, but they don’t want to go there and ask the pertinent questions.”
Up to standards
Accountants usually understand the issue at hand, according to Mr Greco. The challenge is more based around what they do in response.
“Generally, most accountants understand their ethical obligations and play the smell test. If it smells rotten, it probably is rotten. They know when something is not right and they’re seeking guidance on how they manage that issue going forward,” Mr Greco says.
“In some cases, accountants understand the issue and it’s more a case of what they do. In other cases, the best course of action is to confront the client and just explain the ethical and professional standards that is expected from accountants to the client, if they understand the nature of the situation.
“If they’re part of a professional body and it’s part of their profession, then the client generally can also adjust its practices to come in line with complying with the law. If not, then the accountant has to reconsider acting on behalf of that client going forward.”
For accountants still unsure of what to do, Mr Greco says a quick read of Australian Professional & Ethical Standard (APES) 110 Code of Ethics for Professional Accountants is usually a good place to start.
According to the Australian Professional & Ethical Standards Board (APESB), the five fundamental principles underpinning the code, are integrity, objectivity, professional competence and due care, confidentiality, and professional behaviour. However, the code also acknowledged five threats that could compromise or appear to compromise compliance with those principles: self-interest, self-review, advocacy, familiarity and intimidation.
In the past, APESB has introduced safeguards to eliminate or reduce those threats, pointing to 14 other standards and five guidance notes. However, last year, further ethical clarity came from beyond local borders.
Introduced in July 2016 by the International Ethics Standards Board for Accountants (IESBA) and developed over six years based on its global standard, the Non-compliance with Laws and Regulations (NOCLAR) provision sets out a framework for when accountants become aware of potential illegal acts committed by a client or employer.
After the APESB amended its code of ethics in May 2017 in response to the IESBA’s own code, NOCLAR came into effect on 1 January 2018. The most notable effect of NOCLAR is it mandates that public interest is more important than client confidentiality. According to Mr Greco, this is a crucial step towards greater ethical clarity.
“In some cases, NOCLAR puts someone into direct conflict with the ethical standards, but generally the ethical guidelines are that if it’s required by law to be disclosed, then that doesn’t mean you’ve breached the confidentiality agreement,” says Mr Greco.
“If the tax commissioner requests some information and you’re required by law to do so, providing that information doesn’t get you into hot water around confidentiality, because NOCLAR will get you out of it.”
In addition, under NOCLAR, accountants are now obligated to report any misdoings by clients that are not in compliance with the law, not just the tax codes.
“That’s any law, which gives accountants an overriding obligation to inform the appropriate regulator,” Mr Greco says. “It might be something to do with the tax code, or it could be something to do with the environmental act, or it might say something with their work. All those things might come within the standard of NOCLAR.”
But it doesn’t matter how many laws, standards or guidances are provided, Mr Greco believes there will always be people who are constantly looking for ways to shortcut processes. Thus, he believes it’s important that accountants don’t circumvent the ethical framework they operate under, and always be conscious of the standards governing their profession.
“They’re there for a reason. What makes us a profession rather than an industry is the professional and ethical framework that we operate under,” he says.
“At the end of the day, if we don’t adhere to those principles, then you might as well call us an industry. That’s what separates an industry from a profession.”