If there was ever a time that showed arrangements to make money that didn’t have the client’s best interest at heart, look awfully embarrassing once a slight bit of scrutiny has been cast upon them, then it is clearly now.
Dress it up, call it by another name, but it still is what it is. It is still self insurance, even if it comes with a thin transparent veil that would struggle to mask the underlying offer.
The financial services sector, which includes the accounting profession, just went through a Royal Commission on servicing clients. The biggest criteria that is influencing the decision to self insure, is the financial gain. This is clearly not something that puts servicing the client first and foremost. There may be a marketed perception that the administration behind a supported self insurance offering has significant administrative benefits to a firm, but those benefits are largely overstated.
The accounting profession across the world is adopting an international standard for a Code of Ethics. In Australia, CPA and CA ANZ have the Accounting Professional & Ethical Standards Board (APES) which is heavily based on the international standards. Even the Tax Practitioners Board (TPB) have established their own. This is an excerpt of the APES Code:
The normal relationship an accountant has with their client is that they are selling value. Whether the client sees the full value or not is still a matter of commercial decision but it is still based on the notion that the accountant will give ‘this value’ or piece of work for ‘this fee’. Traditionally this is based on time, but alternatively the price is determined around a value proposition. Either it is on the basis of the more time the accountant gives the more they get paid, or alternatively the more value they give the more they get paid. Both have a parallel or alignment between the accountant and the client as they move forward.
Self insurance is the exact opposite of this. An accountant’s gain is based around no time or less time being given to the client, or alternatively no value or less value being given to the client. There is no parallel between the service offering and the client. In fact, by the sheer offering of this service to the client, with the intention of making a bigger financial gain as compared to an insurance backed offering, the accountant has just created a conflict of interest with their client. It is clear to see that under this model, it is in the accountant’s interest to have as many clients participating in their self insurance offering and do as little audit work for nothing as possible.
Whether the accountant believes they will act in this manner is irrelevant, because a conflict of interest is explained by CA ANZ as a relationship or interest which may create or have the appearance of creating a threat to objectivity. CA ANZ also go onto to say that most members would probably say that they would certainly recognize if they were conflicted. However, many of the complaints received involve conflicts that are obvious to an outside party (such as the disciplinary bodies, the complainant’s lawyer or the new accountant) but the members involved have lost perspective and cannot see the issue. The test that the disciplinary bodies look at is whether “a reasonable person looking at the circumstances of the particular case thinks that there was a real possibility of conflict”.
The reality of this is based around the time of a dispute. Ask yourself at the time of a dispute, how would the “reasonable person” view the self insurance offering? It is easy at the concept stage to say that there is no conflict of interest, but objectively there is. Any and every complaint raised by a client in regards to their participation in the self insurance model will be based around the fact that the accountant was conflicted both at the time the service was being offered (i.e. the accountant needs as many non-risk clients as possible to take up the service to fund the times they will need to be providing their services for nothing – so undue influence), and also at audit time (i.e. did they do as much as was required to help the client through the audit given they were not being paid for that work – perception or reality it doesn’t matter).
Don’t measure this issue by the perception of the clients that are easy going. Measure this issue by the clients that will scrutinise this for what it is, either as an offer or during an audit. As a partner, how comfortable would you be to manage this conflict of interest by disclosing face to face with your client that you have changed from offering a service which was previously supported by an insurance policy which gave both the client and the accountant comfort and security, which aligned both the accountant and the client during audits because the accountant and the client knew there was never an issue with the accountant doing as much as was required to get through the audit because they were being paid for it, to now offering the service “in house”?
How do you answer the question from the client as to what are the benefits to them of this decision? The differences are significant. For instance, the client has lost the ability to have external professional fees included if they were required to just name one. There may be more restrictions placed on the offering as compared to the insurance based offering that only the firms know, but will they disclose them? If they do not feel comfortable fully disclosing them, then is this the right decision?
So ask yourself, how significant to the revenue of the accounting firm is a tax audit insurance program? The normal answer is; it is a minor issue in the grand scheme of an accounting practice. For example, calculating the perceived financial benefit that possibly can be achieved by going down a self insurance path (with the obvious risk of possibly losing money as well) the figures we have seen represent around only a possible 0.5% of the firms fees! Why would a firm risk their brand, their reputation, and the individual partner’s reputation on a minor service offering? The reward to risk ratio just doesn’t make sense.
Staying with an insurance based offering avoids the conflict of interest because the Audit Shield offering is not based around a risk of potential profit or loss. Under Audit Shield the firm is in a no net cost/no loss position irrespective of the number of clients that choose to participate and/or the volume of audits a firm has. The success of the product is not based around having as many non-audit clients participating in the program to fund the cost of the audit clients. There is no significant financial consequence of a client not participating in the Audit Shield program given the financial loss under Audit Shield is the recovery fee which is a small contribution to the administration costs only not a gross fee that has an influence/consequence/bearing on whether the firm can make a profit from the self insurance initiative or not.
To find out more about Audit Shield or why self insurance, by any design should be avoided, call our team on 1300 650 758.