Insights from practitioners in Information Management

Issue 89 – Is it worth the risk?

Last week, Shirley Cowcher, Director of Information Enterprises Australia was asked to present a paper on Record Keeping Risks and Responsibilities. It generated a lot of discussion so I asked if I could share it with you.

How many people here today has been the owner of a company or director that has been subject to a Tax audit (State or Federal)?

I was paranoid – I hadn’t met anyone else who had ever been subject to one, but when I received my letter I was worried.  Not because I had anything to hide but I was worried that I might have done something wrong and I would be penalized. As it turns out there was a dispute regarding subcontractors and whether we should be paying payroll tax on their fees – but more of that in a moment.

When I was researching the topic for today’s presentation I found a study conducted by the CPA on record keeping and the potential for companies to be audited, penalized or closed down.  What they found was interesting. It turns out there was no correlation between poor record keeping and being audited. But what they did find was there was a greater likelihood that the companies would face increased tax payments and potential penalties if they had poor record keeping and happened to get audited.   Unfortunately, the research was based on a self assessment survey and asked the SMEs to assess their standard of record keeping themselves.  

Question:  If you don’t know you don’t know how can you assess it?

2nd Straw Poll: How many people here have heard of Clerp 9 or the Corporate Law Economic Reform Program – Audit Reform & Corporate Disclosures Act 2004?
Well, anyone one who holds shares in a public company or holds a position as a director on a public company should have heard of it.

For those who haven’t, CLERP 9 came about as a result of some rather large corporate collapses in the early 2000’s, for example HIH and, and was seen as a way of tightening up some of the sections of the Corporations Act that related to the continuous disclosure of information to the market and Shareholders.

As an overview it requires:-

  • Director’s remuneration should be disclosed and shareholders must vote on it.
  • CEO & CFO need to sign declarations that the financial reports are presented in accordance with the Corporations Act and Standards.
  • The qualifications and experience of the Company Secretary must be disclosed.
  • The Auditor must be present at the AGM and answer questions set by Shareholders
  • The Auditors must be independent, sign a declaration of their independence and must rotate from their auditing duties

How does this relate to taking risks with record keeping, well, if you are a Director of a publicly listed company are you sure that all of the above is happening?  How good are your records?

When Clerp 9 was presented in 2002 and subsequently enacted as the Audit Reform Act there were many that thought, and still do, that many of the corporate collapses were not as a result of failure of the audits to identify problems but more related to “failure of boards of directors to comply with national and international best practice guidelines and standards on corporate governance”.

As you know, corporate governance refers to the rules, processes, or laws by which businesses are operated, regulated, and controlled.  A fundamental concept associated with Corporate Governance is accountability.  To be accountable you need a record of account – and I’m not just talking about financial accounts.

If I told you that the Corporations Act requires your company (I assume you are not a sole trader or partnership) to keep:-

  • All correspondence, annual returns and ASIC Forms
  • Registers of:
  • Members
  • Options
  • Debenture Holders
  • Prescribed Interests
  • Charges
  • Unclaimed Property
  • Minutes of Meetings of Directors and Members
  • Computer Back-ups

And that the Act indicates that financial records must be kept for a period of 7 years and that they must be made available in English and in a readable format.  Are you sure you can provide them?  Are they in print form or in a computer system?  Are you still using the same software or are previous years on an earlier version of the software?  Have you checked to see if they can still be read by the new version of the software?

This period of 7 years seems to be banded about a lot but the Taxation law only requires 5 years but just be mindful that if you are claiming, depreciation or a capital gain or loss on an asset the records need to be kept for 5 years AFTER you sell the asset unless you keep an asset register.  Again electronic is fine as long as you can make it available in a readable form in English when it’s needed.

When I started my business there were two things that stood out as being most important to me:-

  • Look after the people (employees, contractors, clients)
  • Look after the brand (provide quality and don’t compromise on delivering what is promised)

In meeting these two objectives I had to ensure that I was meeting my legal obligations as a manager, consultant and company director.   

Now, just in case you don’t know, Information Enterprises Australia provides solutions and people to support company’s information management needs.  We do that as an:-

  • Employment Service;
  • Consulting Service;
  • Training Service; and
  • Publishers of The Australian Records Retention Manual and F is for Filing

As a company that employs people, particularly as most of them are offered as on-hire to clients, I have to be very familiar with Employment, Industrial Relations, OHS, Superannuation, Workers Compensation and Privacy laws. On top of all those, there is the trade practice and fair trading laws(generally known as Australian Consumer Law), tax laws (Federal and State) and corporate law.  Now as a large majority of our consulting revolves around developing records retention schedules and processing “archived” records for clients, as well as publishing the Australian Records Retention Manual, my consultants and I also have to have a fair knowledge of things like laws of Evidence, Limitations of Actions, Torts as well as research legislation that is specific to the industry to which we are consulting.  Do you know that there are more than 2,000 pieces of Australian legislation (either Federal or State) pertinent to private companies that specify that records must be kept?  Some are quite obscure:-

For example the:

  • Chemical Weapons (Prohibition) Act 1994; and the  
  • Space Activities Act 1998.

Whereas others are commonly known, for example:

  • Income Tax Assessment Act;
  • Corporations Act; and
  • Competition and Consumer Protection Act.

I am a risk taker, but I’m also a belts and braces kind of person.  Yes, I take risks but they are informed and calculated.  But what do I mean by “belts and braces”? Well I get worried when I’m told my company is going to have a tax audit or if there could be a chance that the Fair Work Australia or Worksafe inspector may come to visit. As I’ve said before I get worried in case I haven’t met all my responsibilities.  I might be doing the wrong thing and don’t know and as we all know ignorance is not a defence against the ATO or the Australian legal system.

So, not wanting to be the Director of Jail Terms for my company, and as a company director with a guilt complex, I make sure that I know about the law and the records the company needs to keep to keep me out of jail.  I don’t want to take the risk, thankfully I also have a passion for accountability and corporate governance.

In the 25 years I have been in business a lot of legislation has been enacted, repealed and modified.  There is the Superannuation Guarantee Act, before that I remember we had the Training Guarantee Act, we’ve had Work Choices and now we have the Fair Work Act.  We are currently facing a harmonization of the Workplace Health and Safety which should be very much in your forethought and I’ll give you a scenario relating to this later.  Each time a new piece of legislation comes into being or a piece is modified I want to know how it affects me so I can minimize the risks to my company and in almost every case I need to know what my responsibilities are and what the legislation requires me to do.  Now many pieces of legislation specify that you need to keep some records but others imply the need to keep records as evidence of the actions required by the legislation.  For example, if you work in the mining industry and the legislation requires that you need to report on air quality every 3 months.  Then it implies that you need to keep records of the air quality test you do so that you can produce and deliver the report required.  The legislation may not tell you how long you need to keep them but you need to then think about the likelihood of a workers’ compensation claim or an environmental audit.  This then implies that these records may be needed as evidence in a potential court case.

So what are the limitations of actions requirements where records may be used as evidence in a legal case?  Do you know?  The periods of time in WA vary – for simple contracts it is 6 years, for deeds it varies from 12 to 20 years, for land recovery action must commence within 12 years, for personal injury action must commence within 3 years and for actions of corporate misconduct it is 6 years.  So I minimize the risk of being prosecuted or having to face a civil case by making sure I keep the records associated with the air quality tests I do for a minimum of 6 years.  But let’s think about this in terms of an employee who has been subjected to an air contaminant that has shown up in the quality tests but has not been identified as a health problem until several years after they have ceased to be an employee – how long should I keep the records?  We suggest that these types of records should be kept for 30 years. Which sounds like a lot, but consider asbestosis.

Setting the limitations periods aside, as something you need to be aware of, let’s think about some of the current legislation that does specify the kinds of records that need to be kept and the penalties associated with not keeping them.  If you are not a sole trader or a partnership and your company employs people then you are bound by the Fair Work Act and its Regulations.  The Regulations provide significant detail about the records your company needs to keep about your employees and the conditions under which they are employed.  It includes:

General information about the employee and the award/agreement under which they are employed

  • Pay records
  • Hours worked
  • Leave accrued and taken
  • Superannuation Contributions
  • Individual flexibility agreements
  • Guarantee of annual earnings agreements
  • Termination details
  • Transfer of business records

These records are to be kept for 7 years and each contravention of these requirements could cost your company $1,650 or $330 for an individual.  Doesn’t sound like too much but it is each contravention which could result in a significant fine for your company.  

I’ve previously mentioned the Corporations Act, well the Superannuation Guarantee Act requires records to be retained for at least 5 years and should include documents relevant to calculating the amount of contributions made for each employee, the earnings base under which the contributions were made, the calculations used to determine the guarantee shortfall for each employee and, if the company is liable to pay the guarantee charge, and finally the records of the calculations made for the superannuation guarantee statement.  

The penalty for not retaining these records $6,600 for each offence (60 PU x$110)
Each example I have given you today has highlighted the risks to you and your company for not keeping accurate records.  It could mean monetary penalties in the form of increased taxation payments, fines for failing to keep adequate employment or corporate records or the costs associated with losing a court case which is likely to be monetary and damaging to your company brand.  

But just in case you haven’t got the point let me paint you a scenario based on the newly harmonized occupational safety laws.

You have a very successful business and the new harmonisation of the OHS laws have been adopted in WA (they haven’t yet but they are coming – so watch this space). Under these laws fines for a body corporate may be as large as $3 million and for an individual conducting a business or an officer for a person conducting a business the fine is $600,000 or 5 years imprisonment.  In your business you make decisions and supervise employees.  One of your workers notifies you that there is an electrical cable worn on a computer they use.  You ask the employee to tag it and remove it from the work area.  You check that it has been done and then take 3 days off work.  The employee has not been able to get hold a replacement computer so decides to use the one with the worn cable and while reinstalling the machine gets an electric shock.  Is it your fault?

Some things you should know about this new legislation:-

  • An electric shock is considered a dangerous incident
  • Dangerous incidents are notifiable
  • Failure to notify may result in a maximum fine of $50,000 for a body corporate
  • Failure to comply with the health and safety duty relating to this matter may result in a maximum fine of $500,000 for the body corporate and $100,000 for you as the officer.
  • Records of notifiable incidents must be kept for 5 years and failure to do so could result in a $25,000 fine for a body corporate and $5,000 fine for an individual.

It’s not your fault you say, you did everything that you could to ensure that the employee was kept safe.  But did you document that?   Do you have records of when the last WHS audit was done?  Did you follow a standard procedure for recording the faulty equipment and your direction to the employee?  Can you find the records when you need them?  Are they being retained for the amount of time required by the law?  Can you be sure that your record keeping systems and business practices will protect you and your company from a significant fine or even imprisonment?

This legislation isn’t applicable to WA just yet but it is if you are conducting business in NSW, Queensland, ACT or the Northern Territory – and it is only a matter of time before this law is adopted here.

We hope this has given you some food for thought.

Thank you and I look forward to your questions