A pending new publication on corporate restructuring contains these comments about Code obligations of insolvency accountants advising financially distressed and legally non-compliant businesses.
Are these comments disputed?
“The APESB represents all professional accountants in Australia – being members of CAANZ, CPA and IPA. The Board’s codes both local and international bind members of those accounting bodies, which enforce member compliance.
The main ethical standard is the Code of Ethics for Professional Accountants, APES 110, which has the usual requirements of integrity, competency, independence, fair dealing and so on.
One new requirement in APES 110 is that of NOCLAR, the obligation of an accountant to refer any “non-compliance with law and regulations” by a client, or an employer, to the government authorities. This thereby overrides any obligation of confidentiality owed to the client.
Safe harbour advising
Although the detail of the obligation under APES 110 is more precisely (or vaguely) framed, it does raise the issue whether an accountant, being called in to advise a business in financial distress, might have separate obligations to report any wrong-doing thereby detected.
In the case of directors trying to assist their struggling company, new s 588GA of the Corporations Act gives them some protection against claims for insolvent trading. The protection will be supported if the directors seek out the advice of an appropriately qualified person.
Insolvency practitioners are so qualified. They are invariably accountants, who are bound by APES 110. Turnaround specialists may or may not be accountants, and many are lawyers.
In advising the directors, the adviser may find the struggling business to indeed be legally non-compliant in many areas, to a greater or lesser degree. The retainer of an accountant adviser may need to say that they will be obliged to report client breaches of the law under the Code.
It has been suggested that this represents some impediment to accountants, including insolvency practitioners, being fully engaged in such advisory work.
The Code necessarily acknowledges that it is subject to the law. Compliance with NOCLAR cannot itself be unlawful. As UK accountants are advised, disclosure of breaches may amount to “tipping-off” under the anti-money laundering laws.
The TMA Code and its Best Practice Guidelines – Navigating Safe Harbour, of June 2017, provide the only focused guidance on insolvent restructuring. As much as they address this issue, they require the adviser to ‘assess threshold issues: is the company able to pay employee entitlements and comply with tax reporting obligations?’, referring to certain conditions in s 588GA.
If the business is not compliant to a significant degree in relation to employees and tax, s 588GA may not be available at all. What the accountant then does with that knowledge about the client’s non-compliance is a matter for interpretation of the Code. Even if the non-compliance can be rectified – an isolated internal fraud – to allow s 588GA to continue to apply, the adviser may need to also refer that breach.
TMA’s Navigating Safe Harbour is a working draft and may need to be clarified in light of NOCLAR and of other input forthcoming from members’ experience in dealing with the s 588GA guidance.
Lawyers and others
Lawyers and other non-accountants have no such professional obligations. Legal advice may also be protected by privilege.
There are however other obligations under the law, for example in respect of money laundering, and in respect of serious criminal offences: see s 316 Crimes Act (NSW). Even there, while lawyers have some protection, along with doctors and social workers, accountants have none: Reg 4.
NOCLAR and the various legal obligations impose an obligation to report. Australia has not, yet, gone so far as to proscribing a failure to prevent the commission of an offence, as with the UK’s Criminal Finances Act 2017 and its creation of offences of failing to prevent the facilitation of tax evasion”.