Family Business ~ Insight | IRD Dispute Statistics

Recently I was at a conference and the IRD released some interesting statistics on disputes which I though may interest you.  They relate to formal IRD disputes under the dispute process, so NOPA on…

 

Year ended June 2013  
  • Number of disputes
475
  • Settled pre-challenge
293
  • NOPAs issued per month
30
  • Cases resolved at conference stage
57%
  • Adjudications completed
60
At the conference stage  
  • Completed since 04/10
320
  • Facilitated
60%
  • Progressed to statement of position (next step)
43%
  • Settled – negotiated
28%
  • Settled – negotiated – Conceded – by taxpayer
18%
  • Settled – negotiated – Conceded – by IRD
11%

 

So overall a few thoughts from me:

  1. fewer NOPAs than expected, which shows that the IRD is using the risk review process and often settling with taxpayers before the formal disputes process commences.
  2. Only 60/475 cases went all the way to adjudication.  This shows that the process does work although often taxpayers do concede due to the cost of the fight being so high.

Family Business ~ Insight | To Merge, or not to Merge, that is the question.

As I write this, members of NZICA and members of the Institute of Chartered Accountants of Australia are holding a vote to determine whether the two bodies should merge.  Basically the central arguments for merger are based upon economies of scale, better service provision and better ability to agitate on behalf of its members.  The reality is that with only 90,000 members as a combined institute we are still a small player internationally and I cannot necessarily see that merging will achieve anything to change that.

Recently I had a holiday in Australia and while there I ended up reading the magazine of the Institute of Public Accountants in Australia, the equivalent of our monthly accountants journal in New Zealand.  I was very impressed with this particularly in comparison to our journal back here, which to be honest has become a cellophane covered door stop to many of us because month to month we do not find many in depth thought provoking articles to reach into it.

Reading the Public Accountant was an amazing and uplifting experience because actually there were interesting and relevant articles to me.  They interviewed the new Commissioner of Taxation in Australia, Chris Jordan, who shared his vision for the ATO and why the ATO needed to be more like dentists.  You may think that is a strange analogy, certainly I did, but it was a fascinating read.  He thinks that like dentists were 30 years ago, the ATO and its staff need to become more engaging.  They need to be able to relate more to their customers and to actually be able to talk to them.  He also has some very out there ideas about basically being able to use your GST returns aggregated as your income tax return for the year.  An interesting thought.

More interesting to me however was the fact that the Public Accountant magazine then looked at how William Buck in Victoria has had to change its business in the face of what it sees as an online price competition for the provision of accounting services.  As it correctly notes, internet sourcing for basic bookkeeping services can see the cost per hour come as low as $5 when you are using people in low cost countries.  Their reaction has been to move more into advisory services and place less reliance on compliance.  They found a whole new area of expertise to work in around assisting clients and third parties who are facing financial difficulties.

There was also an excellent article about bury the billable hour concept developed by Ronald Baker.  He is a long time protagonist for the idea that the billable hour is wrong.  Like me, if you have read about the history of the billable hour and where it came from, there are certainly a lot of flaws in it.  It penalises efficient accountants and tends to reward those that are inefficient, and sets value for the client in terms of the efficiency of the provider of the services.  Providing accounting services should be about the value the client receives, not the cost the accountant incurs.  Again an interesting article which goes through and looks at a number of practical decisions.  This is then followed up by an article by Nina Hendy which looks at how do you establish a fair value for services.

At the same time as reading this magazine, I was also reading the Economist, in an online edition.  While I was away on holiday I had taken my ipad with me and finally managed to work out how to use the newsstand function.

What this taught me is that there is a significant benefit in getting magazines online, firstly because you don’t end up with large cellophane door stops and secondly because you can read the bits that really interest you without having to worry about the rest.  In this months Accountants Journal Uncle Tom, one of my favourite columns, made an interesting comment:

“If your audit experience is based on a small job 20 years ago, and you cannot answer straight off how many mandatory assurance standards there are on the XRB’s website, think carefully about your competency.”

This got me a bit worried as I didn’t know what XRB stood for let alone that it had its own website.  What it did make me realise however is that accountants are a diverse bunch of people, and maybe the journal needs to refocus because it is simply providing common information to all accountants.  Wouldn’t it be great if we could all receive information that was relevant to our particular part of the profession and be able to dig deeper into that.  It is a bit like what the Institute did do well with the vote, it provided us with different levels of overview moving into greater detail should you want to.  We could simply look at the high level, or we could go down to the detailed several hundred page discussion document behind it.  This is effectively what we need to do with information provided to accountants.  Maybe I do need to know what XRB stands for, but I don’t need to go any further.  Those green pen holders, oops sorry, I shouldn’t have said that – that do audits, then can dig down deeper and learn about the XRBs website and its various standards.

Whether we agree with the vote or not to merge, it is good to see the Institute pushing the boundaries and challenging us for the future.  However, there are a lot of things that perhaps could have been done and should have been done before looking at the merger, starting with the journal itself.

So What is the Value of an Accounting Fee?

No this is not a rhetorical question, but one that I am asked regularly.  With many practitioners reaching their retirement age (often past the normal retirement age due to poor planning), I am often asked either by them or by people looking to buy their fees or practices what an accounting fee is worth.  The answer is simply “it depends”.

What a fee is worth is based on a lot of different factors, but some of them that you need to take into account are the following:

1  Where the fee or practice is based:  A small provincial town is likely to see less value than a large city simply because of supply and demand, i.e. there are more people looking to buy fees in big cities than there are in many small provincial towns.

2  The relative age of the clients:  If the clients are all the same age as the retiring practitioner, i.e. well over 65, the life expectancy of those clients in an economic sense is going to be less than a more disbursed and average age bracket.

3  The average fee per tax return: While not totally reliable, this gives a good understanding of whether a practitioner is actually charging too much or too little for the services they provide.  Sadly it is often too little.  Last month I had lunch with a practitioner who told me he filed 450 tax returns per year, but his gross fees were only $300,000.  Given that many of those tax returns involved preparing sets of accounts, it is very easy to see that he was under charging, particularly as he was in Auckland.

4  What the terms of the sale are:  While in Auckland I work on a range between 50c and 65c in the dollar for fees as a starting guide only, which may be less than other cities, you then need to look at what the terms of the deal are.  At the shorter end of that at around 50c it will typically be a take and pay arrangement whereby fees are sold and you pay for them regardless of whether they come across.  At the higher end around 65c, it is more likely to be based on the fees that transfer and stick to the acquiring practitioner.  This naturally therefore involves a time payment element either with or without interest.

5  Some commentators like Viv Brownrigg suggest that fees are worth 80c in the dollar.  WHK for instance has been reported to have paid in excess of $1 for a $1 of fees.  However, while I don’t disagree that there are some practices worth that much, I simply often cannot make the maths work on practices at that fee level.  The reason is this, when you buy a fee you buy a future income stream.  That future income stream, after the relevant costs are deducted needs to generate enough profit to pay off the cost of acquiring it after tax, as well as to provide an economic return before it is likely to end.  In the insurance industry as a comparison commission renewals are generally sold at around 5-7 times the annual renewal fee.  This means that there is an expectation that the clients last significantly longer than 5-7 years so that the purchaser still gets an economic return out it.

6  If you end up paying more than a fee is worth, you are effectively either prepared to pay more because you can generate a greater profit out of it because it will add efficiencies to you, or alternatively you are paying for the opportunity to go and find new clients in the future.  You are really paying the vendor of the other fees for this, and not recognising that it is your efforts that will generate the replacement fees.

7  The second problem with the analysis and comparison to WHK is that typically when a practice is sold to WHK, the vendor continues to work for them at greatly reduced ongoing salary levels.  Often when the true economic analysis is done and a comparison is made to what the vendor practitioner was formerly earning, the true recovery is down under 50c in the dollar in many cases.  Sadly many people hold out WHK as an oracle and to be their saviour in terms of what their practice value will be, but in recent years it has bought very few practices in New Zealand.  It also has the habit of cherry picking the best practices in the local areas.

So what is a fee worth?  It is worth what you are prepared to pay based on a fair, economic analysis.

As always, we are more than willing to sit down and talk with you about your options in terms of buying and selling fees and what a practice may be worth. Please call (+64 9 3071777) or email to discuss.