“In their own words”…Dilemmas encountered -Technical issues
In the following extract from the ICAS research publication “Speak up? Listen up? Whistleblow? In their own words – Insights into the ethical dilemmas of ICAS members” we hear from ICAS members about their real-life experiences of ethical challenges, “In their own words”.
“At the back of your mind in terms of personal behaviour you’re always thinking ‘Well, I’m a CA’ – there is still some sort of professional grounding there so it sets the tone”. (Extract from interview with Isaac)
4.4 Technical issues
A wide range of technical issues were raised by interviewees. Many of these were similar in nature to the dilemmas included in Molyneaux (2008) and ICAS (2009), suggesting that technical dilemmas endure. In Hugo’s experience, most of the ethical issues that are reported to his professional body’s ethics helpline are also technical rather than behavioural, money laundering being the most commonly reported, with theft, issues over expenses and errors also featuring.
In this section, some of the dilemmas recounted by interviewees are presented in order to provide insights into the types of dilemmas that can occur. Some are of recent origin whilst others occurred earlier in the interviewees’ careers. In this section, an indication is given of timescale but the main focus here is to provide some insights into how people acted, whereas the presentation of dilemmas in Molyneaux (2008) and ICAS (2009) was to provide case studies for educational purposes.
Cash flow problems and breach of bank covenants
Elliott recounted an incident early in his career which he described as a “quite interesting baptism of fire”. Soon after taking up a new job, he realised that the firm was in breach of all of its banking covenants and that, whilst not always in contravention of accounting standards, “they were stretching things”. He prepared some cash flow forecasts as:
"There was no cash flow forecasting in the business when I went to it, so they had no idea where they were in terms of cash. So I very quickly put a review in place, a forecast balance sheet thing so that we could look at where the cash was coming and it clearly didn’t show a very good picture at all."
When he showed the forecasts to the Finance Director he had been told to “get out” as “he didn’t want pessimists in his business”. The business had been pursuing an aggressive acquisition strategy and he continued that “the company on paper was still highly profitable - I think it made over £50 million - a lot of which had come from this financial engineering”. When these acquisitions stopped, profits drained away and “the Finance Director and I assumed the Chairman told the Financial Controller to find some profit” to avoid reporting, at best, break-even, or, at worst, a loss. This, the Finance Controller duly did, but he also prepared a memo:
"A memo of about 8 or 9 different points, where they would write things back to capital or take income ahead (and I did have this note until a few years ago but have cleared stuff out). But the note was there and he gave me a copy of this, which effectively changed break-even to about a 10 million profit for the 6 months. And so I thought, ‘well there is no way I can go and talk to the banks on this basis because this lacks complete credibility’. Basically I just wasn’t prepared to do it."
Elliott therefore raised the issue with the Finance Director and also discussed it with someone outside of the company whom he trusted. In his words, the decision to speak up was the only one he could have taken:
"It was just a situation which was completely untenable and particularly as I had this role in front of the banks. It would just be inconceivable that I could have explained this to the banks. You just couldn’t do it. I couldn’t have done anything else."
He also took the memo to the then Department of Trade and Industry (DTI) but, to his surprise, the DTI did not investigate further.
Although Diane’s current role is in a not-for-profit organisation, she said that there is still a lot of pressure to grow the business, with some quite challenging growth targets. There is a policy which is applied consistently “but I suppose I have been under pressure at some points to kind of be a bit flexible and it is an area of judgement, so it is not quite as cut and dry as some of the other things. So there has been a bit of tension around that I suppose in trying to kind of inflate revenue positions”. She has also felt pressure “to capitalise more and expense less”. She has been able to discuss these issues with other accountants in her network but feels that this is an area where more support from ICAS would be helpful in order to link her with other accountants in similar situations.
Mark described a practice of over-invoicing that he had seen some time ago at a company that had sales agents throughout the world:
"This was quite common apparently with certain representatives or sales agents in various countries who would make the sales whilst perhaps not being part of a branch or a legal entity there, but they would make the sale on behalf of the company as a distributer, commission to agent or whatever, and from there they would ask for that invoice to be over-invoiced by say 10% and the 10% extra be dropped off in a bank account somewhere."
Mark and a colleague in the treasury function ran the finance function and wanted to eradicate the practice but:
"We came under quite significant pressure…you know people were saying ‘this is always happening, you’re too young, you don’t understand, we are going to lose sales, we’re going to lose profitability, this will not be looked upon…, different ways of trying to, not coerce per se, but influence you to keep the thing going."
He said that it was necessary to remain firm and stand their ground in the face of a lot of pressure to drop the issue but in the end they were fortunate that the CEO listened to their concerns and acted:
"We said it stops now or then we actually offered to resign and you can get someone else to run the department for you and at that time there were various sales guys up to the sales director trying to push us in one way and also even some people from production and so on because there was a little bit of a conspiracy going on between them, that these guys from outside the group, young guys coming in don’t really know, they’re going to change everything, it’s going to affect our earnings, it’s going to affect profitability and everything and we have to get it stopped. In the end the lucky thing was that we had a CEO…. who was prepared to listen to what the law was, what the rights and wrongs were, what was going on in the real world of finance and law as to such procedures and he actually supported us to get the process eradicated. Now that’s very condensed, but it took some months. It didn’t take, it wasn’t like one of these you have one meeting and everybody sits down and then it’s cleared, there was a lot of pressure going back and forward over time until we got to the crunch point when we had to make the final decision."
Edward had experienced concerns within an overseas subsidiary of a large privately owned company. Although his UK headquarters were not directly responsible for the financial statements of the subsidiary, he described them as being “indirectly responsible” and he had queried a stock valuation that he was not “comfortable” with. The matter was ultimately resolved, with the president of the overseas business being fired. However, the process had been very difficult and he was glad that he had kept copies of all correspondence relating to the issue so that he could show that he had raised it.
Among several issues raised by Jill that had happened quite recently were some relating to gifts and hospitality. She described a range of behaviours in her immediate boss including failure to record gifts from suppliers in the firm’s gifts and entertainment register. Gifts such as hospitality at the local football club should have been recorded if over a monetary threshold. The firm had a code of conduct for the treatment of suppliers and conflicts of interest which Jill believed her boss was breaching:
"He either had suppliers who he would bash or suppliers he would have close personal relationships with…he would regularly go out for drinks with…we were always using a (particular supplier name deleted) and other staff would say “that’s because it’s his mate”. So business decisions based on personal relationships was wrong."
Colin recounted an instance where he worked as a contractor at a company for around six weeks per year for over a decade early in his career, hence had a close knowledge of the firm in question. His role was to help prepare the statutory accounts and one of the areas he was responsible for was associated companies, of which there were many, one of which in the year in question became a subsidiary. Colin became concerned that the disclosure note for the statutory accounts was insufficiently detailed and potentially misleading. Colin initially spoke to others working on the accounts in the organisation, then raised the issue with the external auditors.
When it was clear that no changes were going to result from these conversations, Colin raised the matter with the head of the accounting function but again no changes were made. Becoming increasingly concerned, and in view of the accounting deadline looming, he decided to escalate the matter by contacting someone he had known for several years who was a main board director. As it was the weekend, he had to contact this director at home, something he was very nervous about. He described the enormous impact that the whole experience had on his well-being. The director he had approached did deal with the matter, however, and changes were made to the disclosure note but this would not have happened had Colin not spoken with this board member.
Tax issues were frequently mentioned. Two interviewees worked in the area of tax. Sally is an experienced professional at a fairly large national firm and Jim is a partner in a mid-tier regional firm. In addition to these two tax specialists, other interviewees mentioned tax issues that had arisen in their more general accounting roles.
Tax avoidance schemes have received considerable adverse publicity in recent years. Sally said that she “had never promoted any tax avoidance schemes” while Jim said of his firm that “we don’t undertake schemes”. He continued that there was only one client in the office “that still does what I would call schemes and that’s up to him, he doesn’t get them from us. We haven’t invented any. Well, that’s up to him. We just, like, process, things”.
This distinction between inventing a scheme and processing the tax is interesting. Jim stressed that “we put whatever we need in terms of disclosures on the appropriate return” and, whilst saying the situation was “unsatisfactory, don’t enjoy it”, he continued “you have got to help, you can’t say to the client, “Well, no, sorry, we are not doing this”. For him, the client’s need for a professional adviser prevailed.
With some tax issues, there were disagreements as to approach. Sally recounted an example where she had challenged a particular tax treatment that affected a number of clients. She did discuss the treatment with colleagues, including managers, but said that “nobody really wanted to side with me because the tax partner had said ‘this is the way it’s done”. Despite this, she said:
"I made my stance quite clear, I made it known and I filed the returns under protest on the basis that I didn’t agree with the tax treatment. But it was clear what we were doing and we’d given the revenue the chance to enquire into it and to disagree - and we had enquiries into every single one of them. So I did feel validated by that. I can’t say I ever got any acknowledgement that I’d been correct and the partner said ‘The revenue are wrong but we’ll just concede the points because it’s not worth our time’."
Other situations were more clear-cut. Jim recalled a situation a number of years previously where a partner – “one of the straightest men I have ever dealt with” took a clear stand:
"I do remember an individual who had a large back garden and they thought, ‘Well, we have got planning permission to develop that, to build a house in the back garden and sell it on.’ And, he came in for a meeting with our Senior Partner in a previous firm and I, and he basically said, ‘Well, look I am in construction myself, what would you think if I made up various subcontractors?’ And at that time, we had to deduct amounts from payments of sub-contractors. But he said, ‘I am a 40% tax payer, if I was to make up fictitious sub-contractors, deduct 25% from them for these fictitious people and there is a return in it for me, what would you think of that?’ And… the Senior Partner said, ‘We couldn’t act for you on that basis.’ And he said, ‘That’s fine, I have asked the question, you’ve answered it. Fine, let’s move on.’ And we did act for him and he didn’t do anything like that."
Other examples recounted by Jim related to the tax treatment of shares (purchase of own shares, share-for-share exchanges, share options), VAT and remuneration. He was not sure whether all of the instances he recalled were really ethical issues, especially if they related to errors or matters that had been overlooked. His view with any errors that happened in the firm was clear – they should not be hidden, rather the firm should admit to the error and deal with it. He felt that trying to “hide something under the carpet” was “not a good culture to engender in the place” and breeds a culture where people think they can themselves do similar things. He referred to a situation where he had admitted to not being aware of something and was told by the client that “We really respected you for that”, so that the matter “actually worked to my credit rather than against me”.
The above tax issues occurred in professional practice but tax issues were also a feature of concerns within industry and commerce. Jack recalled a situation where a company’s going concern status depended upon the receipt of tax credits for research and development expenditure. Edward found that most of the issues he had seen were “around trading overseas, bids tenders, tax”. He had raised issues with the tax team at the UK headquarters relating to invoices for refurbishment of equipment that had been raised through an overseas subsidiary that he hadn’t felt comfortable with. Of this experience he said:
"That one never resolved because I raised the issue and it got taken out of my hands by more senior people and I wasn’t, ultimately, I wasn’t comfortable with the outcome. And I think I was marked for that one…"
This shows that it is not easy to raise issues. Of relevance here is that the issue was not Edward’s responsibility as it did not happen at the subsidiary he was responsible for so he felt that all he could do was raise the issue with the relevant people:
"I didn’t have any authority or clout to overrule them, I just made sure I didn’t do anything inappropriate. Should I have done more? I’m not sure about that one, maybe I could have done in hindsight… If I had been directly responsible I think I would have behaved differently. But I wasn’t. So that was quite a difficult situation."
Bruce had also seen a lot of arrangements overseas that were made to avoid tax. A pragmatic approach was adopted to get to a position the firm found acceptable:
"The view that we took was the history of so many of these businesses was that, that was how it was. If they acknowledged that and they were opening a line of discussion perhaps through us with the authorities to sort it, then we went with them going forward. If they wouldn’t or were continuing with those practices then you just wouldn’t find them acceptable as a client."
Morven’s most recent dilemma involved the tax treatment of a severance payment to a senior member of staff. The firm wanted to treat it as a non-taxable redundancy payment but the person in question had not been made redundant so Morven’s view was that it was indeed taxable. She had persisted with her view and eventually advice was sought from tax and legal specialists who confirmed her position but the experience had been “horrendous”, causing her “huge angst”. Therefore, although she was vindicated, she was still left with considerable stress, feeling “physically, emotionally, mentally drained”.
A range of other issues had been raised by interviewees, including money laundering (Sally), business owners wanting to put personal expenses through as business expenses (Edward and Jonathan), the creation of false payslips for a senior person in a company in order to facilitate getting a mortgage (Jonathan), a case of dishonest claiming of grants where the money was not used for the stated purpose (Max), a funding request based on erroneous financial data (Max) and a supplier conflict of interest (Max). Max’s examples included ones that he had reported externally. These are covered further in Section 5.3. Sections 5 and 6 of this report contain further examples of technical dilemmas encountered by interviewees. In short, technical issues abound and persist.
In a series of extracts from the research hear from ICAS members about the real-life situations they have faced - “In their own words”.
Hear more about the key findings from the author of the research Catriona Paisey, Professor of Accounting, University of Glasgow