Athe: FG Can Widen Tax Net by Improving Data Collection
Victor Athe, who is the Partner, Tax and Strategy and CMO of Stransact, in this interview speaks about his firm’s current repositioning. Adedayo Adejobi brings the excerpts:
How would you assess the current level of awareness regarding income and corporate taxes?
The Nigerian government is doing the much it can to improve the general tax awareness in the minds of the public. However, you will agree with me that one of the major impacts of the Covid-19 pandemic in the world has been a significant up-scale in the level of digital/ electronic transactions. Nigeria has already put efforts in motion to implement the OECD BEPS Action Plan 1 – Addressing the Tax Challenges arising from digitalisation by incorporating amendments into our Companies Income Tax legislation (via the recently enacted Finance Act, 2019), which is targeted at grabbing the Country’s fair share of taxes from digital and other off-site transactions that would have normally escaped taxation in Nigeria before the amendments were introduced. However, in the area of widening the tax net, government would achieve a more holistic inclusion by creating systems to improve data collection of business transactions across the country. The current efforts of the FIRS at deploying technology for collection of taxes by connecting all business premises in the country to a central server, is a step in the right direction.
What is your outlook for 2020 and 2021?
Emerging economies like Nigeria have, in the past, lost a lot of tax revenue through aggressive tax planning measures instituted by multinational enterprises that actually generate a lot of economic value from their Nigerian operations. However, current efforts by Nigeria to tackle the Base Erosion and Profit Shifting (BEPS) issue by keying into several multilateral frameworks such as the Country-by-Country (CbC) Multilateral Competent Authority Agreement (MCAA) and the Common Reporting Standard (CRS) MCAA, as well as the creation of appropriate local regulations such as the Transfer Pricing, CbC Reporting and CRS Regulations, portend a positive outlook for increased tax generation from cross-border transactions. All these and more related developments will certainly create an increased demand for professional services.
There have been talks about a global recovery which now seem dampened by the Covid-19 pandemic. What’s your take on this?
From a broad outlook, it is clear that the economic uncertainty introduced by the coronavirus outbreak has undoubtedly led to a bigger shock than what was experienced during the September 11 terror attacks or the 2008 financial crisis. Clearly, the current crisis represents the largest economic shock the world has experienced in decades. The reason is not far-fetched. An unprecedented level of unemployment has been created globally as a result of the pandemic. Hundreds of thousands of SMEs have also been adversely impacted globally. Despite increased efforts of governments to cushion the adverse economic impacts of the pandemic with fiscal and monetary policy support, a 5.2 per cent contraction in global GDP has been forecasted for the 2020 year. The growth indices of a lot of emerging and developing economies that were already weakened before the crisis, are likely to plummet further. We have also witnessed a historic tumble in oil demand and oil prices globally. Notwithstanding, dipping oil prices could be a blessing in disguise, since they present an opportunity to economies like Nigeria, who depend on oil as their major source of revenue, to diversify their economies. If the proper strategies, systems and human drivers (with the required technical depth and experience) are effectively harnessed, tax could be a dependable source of revenue for Nigeria in no time.
If the biggest challenge for the audit firms in Nigeria is that of audit rotation. Which side of the fence are you on — firm rotation or partner rotation?
According to documented history, the first ever audit rotation happened during the McKesson Robbins hearings in 1938. The accounting firm (then Price Waterhouse) had failed to detect $19 million in largely scandalous misstatements of inventory and receivables by the company- McKesson & Robbins, Inc. (now McKesson Corporation). The company had evidently falsified records, while Price Waterhouse did not seek to question or verify the validity of the information in their financial statements. The discovery of this fraud led to congress hearings which later crystallised in the birthing of corporate governance and auditing reforms, all in an attempt to reform the accounting profession by the lawmakers. The eventual outcome was the development of the first formal standards for auditing procedures.
The main purpose that audit firm rotation seeks to achieve is ensuring that auditor’s independence is not compromised. Auditor’s independence is directly linked with the auditor’s familiarity with the client, while there is also a direct relationship between auditor’s independence and audit quality (bear in mind that “audit quality” is the soul of the auditing profession). In Nigeria, mandatory audit firm rotation was introduced in 2006 as part of the codes of corporate governance intended to further strengthen auditors’ independence. On the one hand, some researches have concluded that there might actually be no significant relationship between audit firm rotation and auditors’ independence after all. Examining the issue critically, audit firm rotation may possibly lead to a higher possibility of a bad quality audit at inception. It is a well-established fact that first-year audits have a higher tendency of failing than audits done in subsequent years by the same auditor. This is evidently due to the increase in the auditors’ CAKE in relation to the entity being audited as the years go by. Meanwhile, on the other hand, audit firm rotation may also potentially increase the quality of services provided by the current auditor because the audit firm (being aware that their work would be brought under scrutiny subsequently) would attempt to differentiate themselves from other firms through the quality of their work. Mandatory auditor rotation can also potentially limit the formation of auditor –client relationships that often tend to increase the risk of the auditors’ independence being compromised, thereby enhancing their capabilities to spot red flags during audits. The Sarbanes-Oxley Act of 2002 requires rotation of the lead audit partner every five years so that the engagement can be viewed “with fresh and skeptical eyes”. However, in my view, audit partner rotation may actually not achieve a substantially different outcome where all the other members of the audit team remain unchanged. We encourage companies to look outside the big 4 for audit and also consider other network entities like Stransact that is able to offer quality attest services.
The big four have diversified from accounting and auditing into a multitude of services, so there is always a fear of dilution of mission in favour of money. How are you balancing the two?
Recently, the Financial Reporting Council of Nigeria (FRC) issued the big four firms an ultimatum to separate their entities engaged in audit from those providing other consultancy services in a bid to ensure the audit quality of these firms is not compromised as a result of their continuous interactions with the same clients they audit, in other consultancy services engagements. It is a good thing that the FRC has finally paid attention to this very sensitive issue that has been starring us in the face all along. We intentionally separated our firm that provides audit and attest services from the one that provides all other consultancy services as a result of this important consideration.
This is being talked about in the consulting world — the face-off between the strategy firms and the big four. What is your take on the development?
The big four accounting firms have achieved an unprecedented level of growth globally since 2002 (when the Sarbanes-Oxley Act was introduced). Their growth strategy has been to expand their capabilities beyond the seemingly finite realms of the accounting and auditing practices through acquisition of firms with other specialist capabilities beyond accounting and auditing. Thus, the big four have been able to successfully transfer their brand equity in accounting/ auditing to other professional fields. Strategy firms, on the other hand, focus more on an organic growth strategy which might constrain their ability to achieve the kind of global expansion the Big four have achieved. To achieve a higher level of growth, these firms may consider buy out of smaller firms with a congruent culture.
Stransact certainly has an interesting history. We’d love to hear about it from your perspective?
Since 2009, Stransact Partners has been one of the leading firms in tax advisory and resolution practice in Nigeria. We have been advising on numerous transactions in Nigeria for over a decade, especially in oil and gas transactions. For example, out of the initial three onshore blocks divested by one of the IOCs in Nigeria, Stransact provided strategic advice on all of these divestitures. Our advice saved significant sums for all companies involved and we became thought leaders by virtue of that feat. We obtained tax rulings in favour of our clients which was contrary to the position advocated by all the big brands in the business and we have since remained thought leaders in the Accounting, Tax and Business Advisory business in Nigeria. We continue to do similar feats routinely. In 2010, we incorporated Stransact Audit as a separate entity to provide accounting and attest services. We continue to be one of the strongest names in small business attest and we continue to invest more in growing our attest business. We have also been more innovative than traditional big firms in recognising opportunities. In 2011 when Nigeria adopted International Financial Reporting Standards (IFRS), we began gathering knowledge expertise while we also positioned our young firm to become the IFRS knowledge partner to a major Nigerian corporation. In that capacity, we invited numerous IFRS experts from all over the world to work with our team and clients on several IFRS conversion projects. One of the experts we brought to Nigeria later became an IFRS Knowledge leader locally.