All articles in Volume 12 Issue 12

Senate report leaves NFPs in limbo

25 June quote image

The not-for-profit (NFP) sector remains in limbo after a senate committee report failed to break the deadlock between the government and other parties over the future of the charity regulator, the Australian Charities and Not-for-profit Commission (ACNC).

A Bill to repeal the ACNC was referred to the Senate Economics Legislation Committee after it was introduced in the House of Representatives in March. The committee received 155 submissions, with more than 80 per cent of these opposing the ACNC’s abolition.

However, the committee’s majority report was tabled last week recommending that the Bill to abolish the ACNC be passed by the Senate. In contrast, two dissenting minority reports (from the Labor Party and the Greens) called for the continuation of the ACNC.

In their dissenting report, Labor Senators Mark Bishop and Louise Pratt say they found the evidence in favour of retaining the ACNC compelling — not only because of the sheer numbers of charities and other organisations that strongly supported the work of the ACNC, but because of the soundness of their arguments.

Liberal Senator and chairman of the Senate Committee David Bushby said the committee had formed the view that the abolition of the ACNC would, as intended, relieve the regulatory burden from many charities.

The Greens’ dissenting report was also  in favour of keeping the ACNC.

"The government's recklessness on this issue has been highlighted during the inquiry, as we have established that only ‘informal consultations' have been undertaken and that no replacement model for the ACNC has been outlined yet,” says Senator Rachel Siewert, Greens spokesperson on family and community services.

“It would be irresponsible to the sector and the community to repeal a popular and effective regulator without any viable alternative having been proposed.”

In its submission to the inquiry, the Australian Institute of Company Directors noted that it could not support the abolition of the ACNC until the government released sufficient detail on its proposed alternative model of regulation.

Meanwhile, Minister for Social Services Kevin Andrews has asked the Centre for Social Impact (CSI) to advise the government on the best models for establishing the new National Centre for Excellence (NCE) to replace the ACNC. The CSI will deliver an interim report in July, based on its research and consultations, and a final report in early September.

The CSI has launched an online survey on its website at www.civilsocietycentre.org.au and has invited all interested parties in the sector to participate. It will also conduct focus groups, interviews, workshops and a second online survey before it completes its final report.

In the past, Andrews has revealed the government’s desire to replace the ACNC with a charity evaluator model based on the US-based Charity Navigator, which provides free ratings of the finances, transparency and accountability of NFPs. This would mean that the regulation of charities would be returned to the Australian Securities and Investments Commission and the Australian Taxation Office.

In the meantime, ACNC Commissioner Susan Pascoe says the agency will continue to perform its duties until future arrangements are known. She also reminds charities that they are still obliged to meet the immediate reporting requirement to submit their Annual Information Statement which is due by 30 June.  


ATO ruling could put Bitcoin on the board agenda 

Bitcoin is set become a topic in boardrooms as the Australian Taxation Office (ATO) prepares to release a ruling on whether it is a “currency” for tax purposes or not.

In the US, the Internal Revenue Service has issued guidance on Bitcoin, viewing it as consideration for tax-related transactions which could also give rise to a capital gain or loss when sold or exchanged.

At present, the uncertainty as to whether Bitcoin is a currency or a good has placed question marks around the future of its usage.

However, LegalVision CEO Lachlan McKnight believes directors should be thinking about their approach to Bitcoin as a payment method from a business perspective.

LegalVision, an online legal service, became the first Australian law firm to accept payment using the virtual currency in February 2014.

“It will be great to finally know where we stand from a tax point of view,” says McKnight. “We’ve been taking payments in Bitcoin for a few months now and we’re unclear on how the payments should be treated.”

He believes business-to-consumer organisations with international customers, in particular, should be looking to implement Bitcoin payments where possible.

“As Australian regulatory bodies such as AUSTRAC, the Australian Securities and Investments Commission (ASIC), Australian Prudential Regulation Authority (APRA) and the ATO continue to rule and comment on the use of Bitcoin, [its]legitimacy becomes more entrenched,” he says.

“The use of Bitcoin as an alternative to traditional currencies is a phenomena which ultimately benefits consumers. Rather than paying large foreign exchange fees, individual consumers can now seamlessly make cross border payments. A wide range of Australian businesses are in a position to service these consumers; setting up a Bitcoin account is very easy. Ultimately Bitcoin promises to reduce transaction costs and thus benefit both companies and consumers.

“Customers are increasingly looking for opportunities to pay in Bitcoin and those organisations that provide customers with the choice they’re looking for are likely to grow.”

McKnight believes the key questions most boards should be looking at relate to tax compliance. “If your organisation is taking Bitcoin payments, is it paying tax in line with ATO regulations? In particular, if the ATO does rule that Bitcoin is a “foreign currency” for the purposes of Division 755 of the Income Tax Assessment Act 1997, the disposal of Bitcoin will be deemed a designated foreign exchange realisation event. This will mean the disposal will need to be treated under a special set of rules for tax purposes. Boards should be making sure that their organisation’s auditors are on top of the relevant rules.”

At the end of the day, McKnight says boards need to feel comfortable that management is attuned to the rapidly changing regulatory framework. “If your organisation is taking payment or otherwise transacting in Bitcoin, make sure management is working with both legal and accounting advisers with a knowledge of the space.”

He says if the ATO does rule that Bitcoin is a “foreign currency”, the sale of the cryptocurrency (the term used to describe a medium of exchange designed around securely exchanging information) will be deemed a designated foreign exchange realisation event. “Such sales will need to be accounted for in the appropriate way. From a legal perspective, it’s vital that organisations stay vigilant. Australian regulatory authorities have commented and ruled on various issues relating to Bitcoin, but there is no guarantee that the current approach taken will not change. Make sure your organisation keeps abreast of ATO and ASIC rulings in particular.”


How to become anti-bribery compliant

Remaining blasé about foreign corrupt practices law is an increasingly risky game, warns Audine Bartlett, a senior associate at Carter Newell Lawyers.

She notes that many Australian companies, especially those in the resources sector, operate in some of the least transparent jurisdictions in the world, where it is de rigueur for business to be “facilitated” with bribes and public sector corruption is endemic.

She says a company will be especially vulnerable if:

  • It operates in multiple medium to high risk jurisdictions.
  • Relies on third party intermediaries or agents to do business.
  • Lacks a rigorous internal anti-corruption compliance process.

In a recent issues paper, Bartlett observes: “Until more recently, the Australian government has paid scant attention to the activities of Australian companies abroad. In fact, the Organisation for Economic Co-operation and Development (OECD) is ‘seriously concerned’ by Australia’s lack of bribery convictions, with just a single case leading to prosecution out of 28 referrals in 13 years. The level of enforcement is simply not commensurate with the risk profile of Australian companies.”

But she believes times are clearly changing. “Companies participating in corrupt practices could now find themselves in the spotlight of Australian and overseas anti-corruption regulators as a greater emphasis is being placed on cross border co-operation between law enforcement agencies,” she says.

There are a range of actions a company can take to become anti-bribery compliant and to safeguard against prosecution from anti-corruption regulators. Bartlett recommends the following compliance measures:

  • Establishing an executive/managerial level commitment of “zero tolerance” towards bribery that filters throughout the organisation and influences the company culture as a whole.
  • Establishing a corporate policy that imposes a blanket ban on the use of facilitation payments. If operating in multiple jurisdictions, this enables companies to manage the risks more effectively.
  • Conducting regular (at least yearly) anti-corruption training for all staff (including contractors and secondees) on all aspects of foreign corrupt practices law relevant to the jurisdictions in which the company operates. General training should be mandatory as part of the induction process for new employees. However, employees in high risk roles (for example, procurement, project approvals and gas marketing) may require more specialised training.
  • Developing a comprehensive (and well-resourced) company compliance program with nominated internal anti-bribery specialists who can keep, implement and improve the compliance system as required. If the company moves into new jurisdictions or undertakes new activities the compliance program will need to be reviewed. The compliance program needs clear corporate guidelines for gift giving, entertainment and hosting which are easily accessible to all personnel (including the company’s agents and contractors).
  • Devising standard anti-bribery and business ethics provisions in all contracts (for example, based on the Australian, UK and US laws) and which stipulate that all contractor/service provider’s subcontracts need to be back-to-backed.
  • Conducting adequate research on prospective third party intermediaries (and prospective joint venture partners) to determine: their past operating practices; whether they have any history of foreign corrupt practices; their commercial standing; their known affiliations; whether they are accurately representing their technical/professional capabilities; and if they have an adequate compliance program in place.

Bartlett adds that if you are considering engaging an intermediary, the following should put you on “red alert”:

  • They request payments are to be made to offshore bank accounts.
  • The business it is normally engaged in differs from what you are engaging it for.
  • The terms of contract are vague and ambiguous.
  • Unreasonably large commissions or discounts.
  • The intermediary is related to a foreign official or was recommended by a foreign official.


How to judge a director’s character 

The reputations of many boards have been tarnished because of the questionable behaviour of one or more of their directors, but how does one assess a person’s integrity?

This question has gained more prominence since the recent release of the third edition of the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations, which highlights the importance of doing character checks on new directors.

Recommendation 2.1 suggests that listed entities should “undertake appropriate checks before appointing a person, or putting forward to security holders a candidate for election, as a director”.

But while it is relatively easy to check a candidate’s experience, education and criminal or bankruptcy history, Jane Stuchberry, a principal of Guerdon Associates, says the assessment of someone’s character is far more challenging and can be complex and time consuming.

She notes that most researchers agree that a person’s character develops throughout life and is relatively fluid and responsive to context, rather than a static set of underlying traits.

She adds: “Organisational psychologists frequently use instruments, such as personality tests, to assess temperament and there are some instruments available that purport to measure character. However, these assessment tools are most useful when used for professional development purposes, rather than for selection.

“It is not difficult for candidates to respond to the questions in a way that creates a favourable impression (many tests have a built-in ‘fake good’ scale designed to control for this problem, but it is still possible that test results can be manipulated despite these indicators).

“Interviews, too, are widely used to assess character, but they are also not particularly effective. A person’s strength of character tends to emerge only under certain circumstances (such as when the person needs to make a difficult decision or is under enormous pressure), and even in a Behavioural Event Interview where the candidate describes in detail such challenging situations, character traits may not be revealed. It is also not possible to probe for these attributes directly (for example, a question such as ‘Tell me about a time in which you acted honestly or behaved with integrity’ is akin to ‘leading the witness’ and thus can be readily manipulated).”

Stuchberry believes the “deep reference check” is a more effective way of assessing character. It involves talking to many referees in some depth, including those who were not provided by the candidate.

“It is possible to ask the referees provided by the candidate for a referral to others who may have worked with or served on a board with the candidate previously,” says Stuchberry.

“These referrals will lead to a second or even third tier of people who are likely to be more unbiased than the original referees. It is also possible that directors can use their own networks to identify people who know, or have worked with the candidate, or may even use professional networking sites such as LinkedIn to identify and make contact with people who have worked at the same organisations as the candidate. These are known as ‘backdoor’ reference checks.”

Stuchberry says another way of assessing a person’s character is to thoroughly analyse their resume and conduct due diligence on their previous board positions. Who else served with them on those boards? How did those boards perform at the time that the candidate served on that board? Is there any evidence of impropriety or unethical conduct?

“While this approach may provide some indicators as to a person’s character ─ that is, we are in part ‘defined by the company we keep’ ─ it could also be extremely misleading. In other words, just because a director served on a board with someone who has a track record of unethical behaviour, does not necessarily mean that this director also behaved unethically. It does, however, provide you with an opportunity for deep exploration of the candidate’s possible role in any questionable activity or decision-making.”

Stuchberry notes that many boards also arrange social occasions to assess the “chemistry” between a candidate and the directors, and to obtain directors’ input into the nomination process. But she warns that there are a number of drawbacks associated with this approach.

“The first problem is known as the ‘halo effect’ ─ that is, people have a predilection for observing attractive personality traits, such as being energetic, optimistic, confident (which are easy to recognise in a social setting), and assuming that the person also possesses positive character traits. For example, we tend to unconsciously assume that if a person is energetic and optimistic, they are also honest, moral and trustworthy. It is important to remember that positive personality traits and character traits do not necessarily co-exist or are positively correlated.”

Stuchberry adds that because character traits are typically only revealed in specific, uncommon “character-challenging” situations, they cannot be reliably assessed in a social situation where the candidate is likely to be on his or her best behaviour.


SMEs shift from survival to growth

 
Small and medium-sized enterprises (SMEs) are starting to emerge from survival mode and are focusing on growth and stability although many still feel edgy about the state of the economy.

That is the conclusion of the latest edition of debt expert Prushka’s Canary in the Coal Mine briefing paper.

Roger Mendelson, CEO of Prushka Fast Debt Recovery, observes: “In the past three months, we have seen a noticeable trend in businesses shifting their focus to growth, a stark contrast to the period between mid-2012 and December 2013 where focus was largely on cutting costs and business survival.

“However, despite businesses starting to emerge from survival mode, concerns about the state of the economy has company directors nervous.

“Following the federal election, businesses are now moving back into expansion mode and are far more conscious of their expenses than during the heady pre-GFC days.”

Mendelson says businesses, and SMEs in particular, are more focused on their internal debt recovery processes than they were previously and are holding on to their overdue debts for longer.

“Prushka’s research shows 36 per cent of accounts referred to Prushka are between 90 and 180 days and 27 per cent are over 180 days old at time of referral. This is a pitfall for company directors who can improve cash flow substantially by referring accounts to a debt collection agency within 60 days.”

In order to expand business and receive additional orders, Mendelson says companies are being forced to extend credit terms and increase credit to their customers. “Insistence on pre-payment is a luxury which only large businesses, with a strangle-hold on their market, can afford to indulge in.”

He says making the decision to extend credit does not have to be risky for company directors as long as some key rules are followed by their reporting managers, including:

  • Getting new customers to complete a new customer form, so that you obtain detailed information.
  • Carrying out a basic credit check, such as an internet search and call the external accountant or a trade referee.
  • Setting up trading terms and include a provision that if the customer defaults, he will be liable for all collection costs.

Cyber attack 25 June

Boardroom Report disclaimer:

The opinions in Boardroom Report do not necessarily represent the views of the publisher nor the publication. Every effort has been made to ensure accuracy, but no responsibility is accepted for errors. All rights reserved.