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Best advice : ‘fess up’ and stay out of jail

Taxing times ; Robert Richards CPA says a healthy dash realism will keep your clients out of the
clink ,plus why the tax office prefers convoluted question in the case of private rulings.

When I commenced practice it seemed to me that one of the advantages of tax and corporate law
was that it did not involve the messier side of the legal system (that is criminal low)

It used to be the case that the worst that could happened to a tax evader was public shame
.However, as the tax office constantly reminds us by way of media releases ,this is no longer the
case. over the past year it has issued media releases that point to a;

 Four-year jail conviction for a goods and service tax fraud of 51046;
 A two-year jail conviction for a 450.000 income tax refund fraud;
 A seven-year conviction of a tax agent(hart)for marketing a fictitious tax planning

When dealing with the tax office, practitioners are often faced with an ethical quandary;
how to cause a recalcitrant client that to make full disclosure to the tax office without at the same
time causing that client to be penalized (perhaps even sent to jail).

The tax office regularly says it does not decide whether a taxpayer should be prosecuted
.as a consequence it will not include terms within a settlement agreement that precludes it from
taking prosecution action against a taxpayer. the tax office says it is only the director of public
prosecutions that is entitled to give immunity from prosecution.

Practically speaking, it is the tax office and not the DPT that decides whether a taxpayer
should be prosecuted. The DPT will only prosecute a taxpayer if the tax office seeks to
prosecute-via a brief prepared and forwarded to the DPP. This brief might include witness
statement as well as other evidence.

If the tax office believes a prosecuting would be unsuccessful (or if it does not wish to
prosecute a taxpayer)it is hard imagine that a brief would be referred to the DPP.

Although the tax office has prepared a detailed prosecution policy, you do not really need to
spend much time studying that sizeable document. it really is quite simple it a taxpayer has been
blatant, has not taken the initiative in disclosing evasion and the tax evaded is large, you can
expect that there will be little sympathy for that taxpayer.

If however , the evasion is an aberration ,the taxpayer has taken the initiative in disclosure, and
restitution is made as quickly as possible, you would normally find the tax office will not seek to
prosecute the taxpayer(and indeed would be very helpful in aiding the taxpayer in getting his or
her affairs in order)
In may the tax office entered into a memorandum of understanding with the DPP, such
that it would have responsibility for: identifying potential cases persecution, investigating these
cases, and referring the m to the DPP. strangely, the DPP seems to have little responsibility
(other than having the final say on what is put to it by the tax office).

So, practitioners face a quandary as to how fulfill their obligation both to the tax office
and their clients.

Often the best approach is to assist a client in ‘fessing up’ and then paying any
outstanding tax. the client will then be in a position (if the prosecution goes ahead) to plead this
as a mitigating circumstance.

The problem practitioners face here it that while a robust defence of the client’s rights is
what would be expected for tax law purposes, that defence might also be misconstrued and taken
as evidence of non-contrition.

Practitioners might also ask whether it would assist their client were the client to enter
into a settlement agreement with the Tax Office.

The key to dealing with a tax offence is realism. Be realistic as to the consequences of
the offence. rather than trying to do a special deal ,realize the odds are against your client and
the bets that you can do is to make sure your client shows proper contrition and that the tax
offence is an aberration.

This might convince the tax office not to refer the matter to the DPP if it does at least
the client can argue this cooperation in mitigation.

Quality control in a public practice

One of the important issues in a public practice is the creation of a system of quality is
defined as a system of policies and procedures to address leadership responsibilities for quality
within the firm, its ethical requirements, acceptance and continuance of client relationship and
specific engagement, engagement performance and monitoring. quality control system must be
tailored to the circumstances of each individual accounting practice(CPA&ICAA 1997).each
business is unique and, therefore, one set of quality control measures will not be suitable for all
practices. The APESB publishes APES 320 Quality control for firms, which applies to all firms.

The firm shall establish a system of quality control designed to provide it with reasonable
assurance that the firm and its personnel comply with professional standard and that report issued
by the firm on Engagement partners are appropriate in the circumstances(APESB 2006b,s320.3)

A quality control system requires thorough and detailed documentation that describes its
procedures .some of the items that should be documented include a description of the objectives,
its practice’s philosophy on its service and clients, and its contribution to the community and
the profession.

The following issues are specified in the APES 320(s.320.7):

a) Leadership responsibilities for quality within the firm;

b) Ethical requirement;
c) Acceptance and continnance of client relationship and specific engagements;
d) Human resources;
e) Engagement performance;
f) Monitoring;

Accounting should provide reasonable assurance that the elements of quality control are

Leadership responsibilities for quality within the firm

A member of staff such as the principal,senior staff accountant or external consultant of the
accounting practice should be responsible for the quality control system .the duties of this person
are to plan and supervise the implementation and maintenance of the system,as well as
answering any questions when they arise.the person responsible for quality control should also
alert the practice about events and technical pronouncements that may affect the practice.the
partners of the firm should assume ultimate responsibility for the firm’s system of quality
control(APESB 2006b,s 320.9)

When designing a system of quality control the quality officer must consider that as a result of
the different philosophies between partners and the nature of professional judgement, accounting
practices can adopt different approaches to decision making for similar issues.

Ethical requirements

The firm’s should establish policies and procedures to provide it with reasonable assurance that
the firm and its personnel comply with relevant ethical requirements’(APESB 2006b,S.320.14)
These include ‘integrity ,objectivity, professional competence and due care’, as well as’
confidentiality and professional behavior’. this mean that those at all organizational levels should
maintain these ethical requirement, and in particular professional independence as stated in
section 290.when situation and relationships impose a threat to independence then the firm
should take action to minimize those threats or to withdraw from the engagement.

An engagement may continue when it can be established that the client does not lack
integrity, and that there is sufficient expertise within the firm to complete it.
Human resource

The firm should include an organizational chart showing the various functions and work
relationship within the practice, and the flow of work through the practice, including
correspondence, engagement completions and the names of personnel responsible for the quality
control system.

The firm must have ‘sufficient personnel with capabilities, competence, and commitment
to ethical principles’(APESB 2006b,S.320.36) to complete the tasks required of the firm the
person responsible for quality must have sufficient and appropriate experience and ability, as
the necessary authority to assume responsibility of control and supervision. Work should be
performed by members of the firm with the required degree of technical training and
proficiency. personnel should seek timely and requisite guidance and assistance, from other
employees with more appropriate levels of knowledge, competence, judgement and authority if

Accountants should provide reasonable assurance that the work performed meets distinct
standard of quality. The extent of supervision required and the appropriate level of review will
depend on :

 The complexity of the subject matter

 The qualifications and experience of the persons performing the work
 The extent of guidance and assistance available and used

The responsibility of a practice to establish procedures for supervision is distinct from

the responsibility of the person in charge to plan and supervise the work on a particular
engagement adequately. The quality of a practice’s professional services ultimately depends on
the integrity, competence and motivation of the personnel who perform and supervise the work
(CPA & ICAA 1997). Engagement must be performed in accordance with professional standards
and regulatory and legal requirements (APESB 2006b, s. 320.46). clients should be assessed to
avoid the risks of association with a client whose management lacks integrity.


Policies and procedures should be designed to provide reasonable assurance that the
system of quality control is ‘relevant , adequate, operating effectively and complied with in
practice’ (APESB 2006b, s. 320 .74). monitoring includes timely and periodic evaluation of a
practice’s quality control policies and procedures including inspection and review.

Quality control monitoring requires ongoing consideration and evaluation (s. 320.77). the
following is a useful checklist detailing the steps required when developing and implementing
quality control.
 Analyse any new developments in professional standards and how they are reflected in
the firm’s quality control policies and procedures.
 Determine and document the corrective actions o implement these quality control
 Prepare or update standard forms and formals, files and related manuals.
 Communicate to all personnel the quality control policies and procedures,including any
weakness identified in the system and monitor the effectiveness of the quality control
system .

Learning tips

Do you know…

11.4 The accountant acting as a tax agent should take measures to minimize the risk for
noncompliance and subsequent litigation. Keeping necessary documentation and adhering to the
requirements of a professional will protect the tax agent

11.5 Accountants are responsible for designing, developing, implementing and monitoring
mechanisms for quality control, which must be tailored to the circumstances of each individual
accounting practice.

11.6 When designing quality control, accountants should consider, among other things, the
philosophy of the practice, organizational structure and the types of clients the practice deals

Quality control for specific practice areas: financial reporting and compilation

Financial reporting and compilation reporting are specific accounting areas in which quality
control may suffer because of specific risks that can affect the completeness and accuracy of
financial statements.


Before undertaking to provide financial or compilation reporting services, it is important for

accountant to understand clients thoroughly . They should document background information
about the clients, such as their business structure, business activities and overall reporting
requirements. A client information form may be used to make this process easier. This is a
standard form that contains information about a client and is now available in electronic form
with some accounting packages. It should be reviewed and updated regularly.
Furthermore, they must be aware of any significant account balances and any risks that may
affect the completeness and accuracy of financial statements. These may include the risk of
material misstatement or error for individual account balances, and any other information used in
preparing financial statements and returns. Factors that may affect risk include:

 The nature of the industry in which the client operates

 The internal control structure
 The level of knowledge and experience of staff
 The tax practices adopted
 The client’s history and background (CPA & ICAA 1997)

Accountants must also develop a working knowledge of the relevant legislation, such as
Corporations Act 2001 and the Associations Incorporation Act 1981.

Differentiating compilation, audit and review engagements

The differences among compilation, audit and review engagements can be subtle and the
responsibilities overlap in many ways. However, it is important to maintain the transparency and
independence of each aspect. The following administration techniques can be helpful in
differentiating between the different roles.

Engagement Letter

An engagement letter should document and confirm the services to be provided (such as
assurance, non assurance and compilation of financial reports) as well as an estimate of the
applicable fees. Auditing standard ASA 210 Terms of audit engagements lays the foundation of
how the engagement letter should be written, time budgets kept, staff allocated and the work
program for each client organized. The client should acknowledge, in writing, the contents of the
engagement letter and copy of the engagement letter should be filed in the working paper file.
This will help differentiate the type of work to be performed and will minimize future
misunderstandings and errors that could lead in litigation.

Work Program and staff planning

The accountant must determine what information is required from the client and how much. This
includes the provision of data on the client’s recording of transactions, controls and systems and
specific financial information such as a sales, journals, aged debtors listing, accounts payable
listings and valued stock counts.

When planning the program, consideration must be given to areas of risk. If these exist, then an
accountant should record additional procedures, such as detailed checks, and should also check
that the client has carried out the work.
Furthermore, staff planning is essential upon engagement of any client, and should include
considering who will carry out the work and who will review it (having regard to the complexity
of the assignment, the nature of the services and the risks). If no staff can perform the required
work, then a specialist’s assistance must be sought to carry out or review some or all of the work.

At the planning stage, the program should be approved by the principal and placed in the
working paper file (CPA & ICAA 1997)

Control and review Procedures

Control and review procedures must be followed and documented because of the increasing risk
of litigation. Accountants should provide evidence of control and review procedures. A summary
record of all discussions in meetings should be kept. For example, the following discussions
should be documented:

 Tax, business, financial management or other advice given

 Information provided, particularly in response to questions from the client
 Problems encountered during an assignment (e.g. lack of information or potential errors)
 matters raised that may require further attention but the client does not wish to pursue
 Verbal opinions provided by a consultant (CPA & ICAA1997)

It is desirable to confirm in writing any conversations with clients during meetings or over the telephone.

A review ensures that the terms of the engagement have been carried out completely and accurately, and
that due care and skill have been exercised. Staff responsible for the assignment must prepare a
completion memorandum that includes the following:

 The scope of the engagement (e.g. compilation or agreed-upon procedures)

 Any outstanding or unresolved matters
 Significant decisions made by staff completing the assignment, particularly if they affect the
financial reports or tax returns
 Matters requiring the attention of the principal arising from work carried out
 A conclusion

However, the principal of the practice is ultimately responsible for the completion memorandum (CPA &
ICAA 1997)

Special purpose financial reports

Preparation of special purpose financial reports is another area and unique issues of responsibility. The is
for the preparation of taxation returns or for the obtaining of a business loan from the bank. However,
these report may be used by other users (i.e. creditors), who can rely on these reports to provide the firm
with funds that they may never be able to recover in the future. These issues are discussed in more detail
The compilation report must include the specification of the report, including clarification of whether it
is a general purpose financial report or special purpose financial report.

A disclaimer of liability must appear in a compilation report, which is attached to an unaudited financial
report, and is referred to on each page of the financial report. Any liability disclaimer should be carefully
worded. The following in focus vignette provides an example of a compilation report disclaimer.
Compilation report to Green Investments Pty Ltd

On the basis of information provided by the directors of Green Investments Pty Ltd, we have compiled
the special purpose financial report of Green Investments Pty Ltd for the period ended 30 june 200X as
set out the following pages. This report is in accordance with APS 9 Statement on compilation of financial

The specific purpose for which the special purpose financial report has been prepared is set out in note 1.
How far accounting standards and other mandatory professional reporting requirements have ben adopted
in the preparation of the special purpose financial report is set out in note 1.

The directors are solely responsible for the information contained in the special purpose financial report
and gave determined that the accounting policies used are consistent will the financial reporting
requirements of the directors and members of the company.

Our procedures use accounting expertise to collect, classify and summarise the financial information
provided by the directors, into a financial report. Our procedures do not include verification or validation
procedures. No audit or review has been performed and accordingly no assurance is expressed.

To the extent permitted by law, we do not accept liability for any loss or damage that any person, other
than the company, may suffer arising from any negligence on our part. No person should rely on the
special purpose financial report without having an audit or review conducted.

The special purpose financial report was prepared exclusively for the benefit of the directors and
members of Green Investments Pty Ltd and the purpose identified above. We do not accept responsibility
to any person for te contents of the special purpose financial report.

J Accountant, Director

Dated: 14 August 200X

New areas of professional responsibility

Accountants can find themselves unexpectedly involved in litigation involving new areas of practice that
may not have been expressly provided for in the firm’s documentation. A letter setting out the rules of
engagement, together with professional indemnity insurance cover, can protect them if they have acted in
good faith. Where there is an issue as to the extent of the professional’s representation, the engagement
letter can become critical evidence. It will clearly state that an accountant’s work papers are being
prepared are being prepared in case there is litigation.

The professional indemnity insurance is essential to protect both accountants and their clients and to
minimize the financial damage from noncompliance. There are several reasons to insure against litigation
for claims, including:

 The readiness of people to engage in litigation

 The incidence of frivolous and vexatious claims
 The scarcity of qualified and experienced staff
 The increasing complexity and diversity of the public accountant’s work.
Professional indemnity and diversity of the public accountant’s wor, but also the legal expertise to deal
with and minimize the effects of a claim against a practice. Furthermore, it ensures protection, from
claims in respect of any civil liability incurred by the accountant or the firm in connection with public
practice. If for any reason the professional indemnity insurance applied for by an accountant is refused, or
the policy is cancelled or lapses, the accountant is required to advice his or her professional society in
writing within seven days (CPA & ICAA 1997)

Although the letter of engagement and professional liability insurance are designed to protect the
accountant and firm from unexpected litigation, accountants should be aware of the following vewer areas
of practice.

Social responsibility reporting

It may be the accountant’s responsibility to review the effectiveness of initiatives taken to choice the
firm’s social objectives and improve its community position against polluters. Social and environmental
reporting is a rapidly growing area of expertise, and accountants should familiarize themselves with the
various guidelines when preparing reports. This topic is discussed further in chapter 7. At the very least,
the economic goals of firms should be consistent with socially responsible behavior (Henderson et al.

Financial Advice

Accountants must be aware of their professional responsibilities under the FSRA. In general, accountants
can provide typical professional advice that is not required to be provided by a financial services licence
holder. An example of this would be advice on effective ways to acquire business assets such as motor
vehicles by hire purchase or leasing (CPA Australia 2005)

Anti money - laundering legislation

Under the new antimony-laundering legislation, accountants need to keep records of both the identity of
their direct clients and their activities. Accountants must observe any multifaceted and extraordinary
transactions and report these in good faith. They must report to the Australian Transaction Reports and
Analysis Centre (AUSTRAC) if they have reasonable grounds to believe a business deal is related to tax
evasion, a criminal offence, proceeds of crime or a terrorist financing offence. The duty to report a
suspicious business deal is inconsistent with the duty of confidentiality owed to their clients but the
Financial Transactions Reports Act 1998 overrides client confidentiality. AUSTRAC can take court
action for injunctive remedies to secure conformity with the requirements of the Act. Criminal penalties
also apply for non compliance.