One set of rules for business and another for the crims? The border between the two is blurring and business people who flout the law and ignore their responsibilities may end up in jail. Cameron Cooper reports.
If the regulatory watchdog doesn’t get you, the courts or taxman surely will.
As a raft of corporate governance reforms arrive, businesses are confronting a tough new accounting and auditing regime that can impose severe financial penalties and, in extreme cases, a stint in jail.
The challenges are emerging on many fronts – from more aggressive regulatory bodies, from an Australian Tax Office that is hounding debt-laden businesses, and from new industrial manslaughter laws that are forcing business leaders to address occupational health and safety issues (see below).
Amid efforts to restore investor confidence following a string of corporate collapses, companies are also bracing for the Corporate Law Economic Reform Program (CLERP 9) and changes to International Accounting Standards (IAS) while adjusting to the Financial Services Reform Act (FSRA) and new Australian Stock Exchange (ASX) guidelines.
The Australian actions follow a crackdown on corporate corruption in the US that has netted some big names, including senior executives at Tyco International, WorldCom, Enron, and even home decorating guru Martha Stewart. Among the casualties, Enron Chief Financial Officer Andrew Fastow has pleaded guilty to conspiracy and been sentenced to 10 years jail. Expect more imprisonments; seven of the 12 highest-profile corporate governance scandals on Wall Street involving individual companies have recently resulted in jail time for executives.
Bad news blues
In Australia, as media headlines rattle around the big end of town about possible illegal activity, some board members and directors have been shifting uncomfortably in their seats. ASIC has publicly stated that corrupt executives should not escape a criminal record or time in prison just because the government has given it the power to impose mere fines on errant firms.
While most of the publicity has so far involved high-flyers and high-profile failures there is a possibility that all managers could, at some time in the future, be at risk of serving jail time if they ignore the law. The issues in the past have always been that it is “only business” and “everyone does it” and that it “isn’t criminal”. This is unlikely to cut much slack in a courtroom.
Wholesale incarceration is not on, according to Belinda Gibson, a Partner specialising in corporate law at Mallesons Stephen Jaques. Gibson says, however, that changes to independence rules, for example, will put pressure on auditing firms to get it right, with “jail the ultimate penalty”.
“(But) I doubt that anyone will go to jail. I suppose if it were bad enough it would be technically possible,” she says.
Gibson says new auditing standards will drill down into the application of auditing and accounting standards.
“The accountants are going to have to sign off that they have applied the accounting standards as law. And they’re going to need to do a lot more work, I expect.”
She says most companies are starting to bed down corporate governance changes on all fronts. “The big issue now is to get it through the culture of the organisation … and that’s never going to be a short-term proposition.”
Cath Mulcare, a Policy Adviser on corporate reporting at peak accounting body CPA Australia, says there have been “misplaced fears” over corporate governance reforms. Criminal and financial penalties aside, she says the major risk is a compliance burden that could see businesses concentrate too much on regulatory aspects “and lose sight of running the business”.
Mulcare is confident CLERP 9, which mainly affects larger organisations, will not overburden SMEs but says CPA Australia will monitor “regulatory creep”.
“If we see it, one, we’ll fight it and, two, we’ll educate about it,” she says, adding that the reforms are for the most part appropriate and essential for capital markets. “It’s all about balance and I think Australia has the balance right.”
Smaller companies can also breathe easier following the ASX decision to water down its controversial corporate governance guidelines by excluding smaller businesses from tough rules on the structure of audit committees. It concedes that a box-ticking approach to regulation is inappropriate.
Only the top 300 sharemarket-listed companies will now need to comply with ASX guidelines requiring audit committees to comprise solely non-executive directors.
The role of independent directors has been a key issue in the NAB boardroom row following its $360 million currency trading scandal.
Keith Reilly, Director of Technical Standards at the Institute of Chartered Accountants of Australia, says despite the recent woes of NAB directors and executives, the positives outweigh the negatives with corporate governance reform in Australia.
“I think with any new legislation people take time to come to grips with it,” he says. “The reality is that we are in a continuous improvement-type mode whether it’s accounting or auditing.”
Reilly believes the principles-based approach of CLERP 9 is more appropriate than the prescriptive nature of Sarbanes-Oxley legislation in the US. However, he advises against a “knee-jerk reaction” to corporate collapses.
“Where I think people lose sight at times is that you’re going to continue to have corporate failures,” he says. “Just because you have a corporate failure doesn’t mean to say people broke the rules or got it wrong or you should fix things up, otherwise we’d all be just in government bonds.”
Reilly believes there will be some “trickle-down effect” for SMEs but that accountability issues are fewer because of the absence of large numbers of shareholders.
“I wouldn’t like to think that we’d see a huge amount more accountability coming (for SMEs) because I don’t think it’s needed.”
In the new era of corporate accountability, the main penalties seem likely to be in the form of financial costs. In the US under Sarbanes-Oxley, some companies have reported 30 per cent increases in audit costs.
The tax burden
As if corporate governance reforms are not enough, businesses are also under fire from the ATO.
A tougher tax office and tighter bank finance are likely to push up the number of insolvencies this year, especially for SMEs. Now that GST reforms are in place, Tax Commissioner Michael Carmody is turning his attention to debt collection, and many troubled small businesses will suffer. The new approach to debt collection is compounded by the ATO’s high-interest rate – presently more than 12 per cent – on outstanding tax.
The Tax Director of the Taxation Institute of Australia, Michael Dirkis, says the ATO put a “huge diversion of resources” into the implementation of the GST. In trying to rein in outstanding debt, it has sent out a wake-up call to complacent SMEs.
Dirkis warns: “They’re either going to have to pay up or face having their doors closed with the assistance of the Tax Commissioner.”
Figures from ASIC show that insolvencies increased a mere 1.6 per cent during 2003, from 10,220 to 10,386. However, many insolvency practitioners expect this figure to soar over the next 12 months. They see many business people come in with a director’s penalty notice from the ATO and a petition for winding-up orders. The Insolvency Practitioners Association says much will depend on how aggressive the ATO is this year. A tough line is expected.
Dirkis says some SMEs have grown accustomed to letting Business Activity Statements drift. “It becomes a little bit like ‘well, they’re not going to do anything’, and the money that you might have set aside then disappears. So then you get into this cycle of non-collection and non-payment.”
CPA Australia’s Senior Tax Consultant Garry Addison agrees that the ATO has switched to compliance mode and notes that “micro-businesses” – those with fewer than five staff – make up about 60 per cent of overdue debt. Addison says laggards face general interest charges, penalties for late payment, and the prospect, in extreme cases, of prosecution by the ATO.
He says the ATO has a difficult line to walk in terms of enforcement. It wants to show empathy, “but to the extent that they don’t collect it and other people are paying it, there is a degree of inequity there”.
The ICAA’s Small Business spokeswoman Sue Prestney says there have been two key problems: businesses struggling to handle GST requirements, and using the ATO “as a bank”. Some businesses are up to nine or 10 BAS statements late on payment.
Prestney says the ATO’s tough hand is being forced, adding “the chances are that if a business owes that much in tax, they probably owe other people as well”.
Directors should beware. Under the Income Tax Assessment Act, they can be held responsible for pay-as-you-go withholding tax. And, under the Corporations Act, directors are personally liable for a company’s debts if they knew or suspected that a company had become insolvent.
“The trick,” according to Prestney, “is to know when you are insolvent, and the problem with a lot of SMEs is that their accounting is just not current enough for them to accurately prove that they didn’t know they were trading while insolvent.”
Dirkis does not think the ATO is taking a big-stick approach but adds that difficulties for some businesses are inevitable.
“I think the problem they are going to face is that there’s a group, certainly at the micro level, who once they get behind they never really catch up,” he says. “The issue is can they ever pay it back?”
More high-profile court cases. More accountability dramas. And more business closures. It is shaping up as a busy year for business watchdogs – and the headline writers.
ATO on the lookout
The Australian Tax Office’s tough line on tax debtors is illustrated by the case of a small-scale manufacturer whose owner had been diagnosed with degenerative memory loss. The business owed the ATO more than $200,000 in taxes, penalties, and interest. The man’s wife, acting on his behalf, tried to reach an arrangement for the business to pay its debts. The ATO agreed to fortnightly payments of $1300 but demanded that the whole amount be paid within six months. After a complaint from the manufacturer’s wife, the Commonwealth Ombudsman ruled that a more flexible approach should be adopted in the circumstances. The ATO agreed to drop interest and penalties and to be flexible on payment schedules, but it took rights over the couple’s properties.
Fatalities in the workplace
A fatality in the workplace is one of the most traumatic events any manager will ever face.
There may be serious issues of culpability and responsibility and there will also be almost overwhelming issues of trauma and ongoing stress faced by the staff.
Managers and companies that fail to provide a safe and secure workplace now face the prospect of tougher laws with significant repercussions. Tough new industrial manslaughter legislation in the ACT may become the norm across the country. Under the ACT law, negligent or reckless employers who have caused the death of an employee can be fined a maximum of $5 million, and individuals face up to 25 years jail and a $250,000 fine.
A review of Victoria’s occupational health and safety laws is also eyeing a criminal charge of industrial manslaughter.
However, the ACT laws are being challenged by a Federal Government bill that creates a separate set of OH&S laws for commonwealth agencies and employees in the ACT.
Federal Workplace Relations Minister Kevin Andrews argues the ACT’s industrial manslaughter laws are “a retrograde step”. In response, the ACT Industrial Relations Minister Katy Gallagher claims the federal plan will create a complicated system of laws and “we will resist any attempt, any move to override a democratically elected government”.
The battleground has emerged as prominent cases of work-related deaths are being played out in the courts. An inquiry into asbestos exposure at Whyalla’s BHP shipyards in the 1970s and 1980s has edged closer as the toll of diseased workers climbs. And the building contractor fined over last year’s death of 16-year-old NSW roofer Joel Exner has been served with another summons over a similar workplace fall two years prior.
The legislative rethink comes as HR departments are also being left to tackle the tricky issue of drug or alcohol-impaired staff. Australian Institute of Health and Welfare research indicates that 10 per cent of workplace deaths and 25 per cent of workplace accidents are a result of drug or alcohol impairment.
In the ACT, employers are not the only ones who might need a good lawyer. Criminal liability can extend to “senior officers”, including executives, government ministers, and anyone in a position where they take part in decisions affecting the day-to-day operations of an organisation.
A senior officer is guilty of industrial manslaughter if his or her conduct is reckless or negligent or if they fail to do something that would have prevented the death.
Under the new ACT laws, all transport employers, for example, are liable to being jailed if a truck accident results in death. The good news, according to statistics from the National Occupational Health and Safety Commission, is that the incidence of avoidable deaths has nearly halved in the past five years.
Total compensable workplace fatalities fell from 429 in 1997 to 297 in 2002.
The winding up of Budget Lifestyle Homes has flagged the intentions of the Australian Securities & Investments Commission as it cracks down on insolvent traders.
After the business’s sole director Doukas Petrou disappeared, leaving behind unpaid creditors, liquidators found the business had outstanding debts of $326,000. The only substantial asset was a property with limited equity that could not recoup the amount owed to creditors.
The Supreme Court of NSW has confirmed the appointment of liquidators over the Wollongong company and made an order for the company to be wound up following an application by ASIC.