A strong corporate ethic has effects deep into the stakeholder community.

Owner-managed businesses are under increasing pressure to ensure that their conduct as corporate citizens and the conduct of their employees as private citizens meet certain standards of ethical behaviour. It is all too easy for owner-managers to forget, however, that even though their business is run behind closed doors, the stakeholder community that buys its goods and services and on which it depends for employees, suppliers and financing have expectations about how it and its employees should behave.

Unfortunately it is only when an employee steps outside the unwritten but publicly assumed framework of expectations does the owner-manager or the employee understand that an ethical standard has been breached.

Business behaviour that may raise ethical eyebrows among stakeholders includes:

• Toleration of swearing, bullying, sexism or sexual harassment
• Bypassing environmental protocols, safety standards or employment standards
• Hiring practices based not upon qualification but gender, nationality or race
• Remuneration based on subjective evaluations rather than performance measurement
• Advancement based not upon evaluation but favouritism
• A reward system based strictly upon closing the deal rather than satisfying client needs
• An attitude that employees are there to be exploited rather than developed and rewarded
• An attitude of indifference to the law and employee safety and welfare

Business Ethics

Business ethics may be defined as codes of principles and values that govern decisions and actions within an organization.

Corporations large enough to have an HR department may have a written mission statement and code of ethics; smaller businesses may just assume a code of some sort to be an unwritten part of the corporate culture. As the age, gender, ethnic, educational and other factors in the employee mix change with the company’s growth, however, owner-managers may find it necessary to create a coded business ethic for all employees. A Google search of business ethics turns up about 20 million results, a measure of the extent of debate around this issue. Obviously, no magic formula exists to create a company ethic. There are, however, two approaches to corporate ethical behaviour that should be part of any in-house debate.

Approach 1

Owner-managed businesses answer the same question posed by their larger counterparts: “Is the purpose of our business solely to make profit for the shareholders or are we responsible as well to the greater good of our broader stakeholder community?” When shareholders (owners) instil in management a philosophy that their only purpose is to provide a return to the shareholders, concerns for employees, third-parties such as suppliers, customers or society in general, may go out the window. This bottom-line approach can lead to money-saving methods that reduce workplace safety, jeopardize product safety, or endanger the community.

 Approach 2

An organization shows the flip side of “profit at any cost” when shareholders instil in management the requirement to consider the needs of all stakeholders within the influence of the company. Stakeholders are not just the shareholders; they include everyone who derives value from the survival of the business: employees, suppliers, customers and all those other small businesses such as the local grocery, clothing or appliance store, or even the movie theatre that survive on the personal spending of employees.

The scope and breadth of influence, of course, depends upon the size of the community and the ownership of the business. A small retail store owned by generations of the same family may be willing to allow political posters in its window at election time because the owner wants to be part of the debate over local issues.

On the other hand, a national franchise with stores coast to coast may not want its name to appear associated with any issue and therefore prohibits local franchisees from displaying anything concerning the community. The national franchise’s inaction creates pockets of silence and excludes itself from the very community upon which it depends for its business. Is its behaviour ethical or merely self-serving?

In a world constantly influenced by social media, owner-managers must be aware that any action within their sphere of influence may have a butterfly effect upon local, regional and federal governments, the community and its residents. For this reason, owner-managers and their employees may wish to consider whether any action or inaction may be perceived as ethical or unethical.

Businesses and the stakeholder community in which they operate have a symbiotic relationship: the business needs the support of the community and the community needs the business for its prosperity. When a business is perceived as unethical all community members suffer. The challenge for owner-managers and employees is to consider the potential ethical consequences of their actions.

Four Questions

Perhaps if employees asked themselves these four questions before making decisions, incidences of unethical behaviour would be fewer:

1. Is my decision based upon my knowledge of the truth?
2. Will my decision be fair and respectful of all stakeholders?
3. Will my decision add to the goodwill my company enjoys in the community?
4. Would I be ashamed if my decision became public knowledge?

As much as we detest written procedures, a written code of ethics raises to consciousness what employees used to take for granted. It is the framework any business needs to show all employees what is expected of them by the company and by the law. Without formalized procedures a business could discover it has not performed the due diligence required to protect third parties from unethical acts committed by the business and its representatives.

A World without Madoff

If rules and regulations could control human conduct and prevent unethical behaviour, the Quebec-based Earl Jones and the USA-based “Bernie” Madoff ponzi schemes might never have happened. In the final analysis, corporate ethical behaviour must reflect the ethical values of stakeholders in order to be acceptable. It is the owner-manager’s job to ensure the ethical behaviour of all within the business meets or exceeds the expectation of this community.

Penalties for income tax evasion can range from heavy fines to imprisonment.

Who doesn’t hate paying their income tax? However, most Canadian taxpayers, including owner-managers, understand that paying their fair share of income tax is simply the price of living in Canada with its many benefits. It is not surprising that those who do pay their share of income taxes are justifiably outraged by those who do not pay, especially if it appears they are able to get away with it.

Tax avoidance, or minimization, is the skillful use of the tax laws to minimize the amount of tax owed. Tax evasion, on the other hand, may be defined as failing to report taxes owed, reporting inaccurately or using some illegal means such as fraud to reduce the taxes owed under the tax laws.

The Cost to Taxpayers

The cost of delinquency to the people of Canada is enormous. Tax Justice Network, a London-based independent organization created in 2003 to monitor tax systems around the world for fairness and transparency, claims the people of Canada lose about $81 billion annually through tax evasion. That’s four times what we spend on defence and almost one third of what we spend on healthcare every year.

In fact, tax evasion is taken so seriously by the Canada Revenue Agency that it has a “Newsroom” www.cra-arc.gc.ca/nwsrm/cnvctns/menu-eng where it uses court records to publish press releases announcing convictions for tax evasion. The CRA does this “to maintain confidence in the integrity of the self-assessment system, and to increase compliance with the law through the deterrent effect of such publicity”.

The Cost to Delinquents

Punishment for tax evasion can be a fine, jail time or both. Convicted tax evaders must pay the full amount of taxes owing plus interest and any civil penalties assessed by the CRA. Failure to file a tax return can lead to a fine of between $1,000 and $25,000 and as much as 12 months in jail. Making a false or misleading statement on the tax return or wilfully evading paying taxes can bring a fine of between 50% and 200% of the amount of tax owed and a two-year prison term.

Rogues Gallery

The following examples from the 2011 “rogues gallery” is only a small sampling of the kind of violations prosecuted by the CRA.

1. Failure to Comply with a Court Order

In June 2011, the Ontario Court of Justice found a taxpayer guilty of eight counts of failing to comply with a court order to file outstanding personal income taxes for the years 2000 through 2007 inclusive. The taxpayer was fined $8,000 and ordered by the courts to file the outstanding returns.

The taxpayer could easily have avoided the fine and possible additional penalties by meeting CRA’s request to file. When returns are outstanding, the CRA’s policy is to ask the taxpayer to file the missing returns. If the taxpayer ignores the request and fails to file, the CRA then serves a notice demanding the returns be filed. In this case it is apparent that the taxpayer did not comply and therefore charges were laid.

2. Tax Preparers Sentenced

Tax preparers themselves are not immune to scrutiny by the CRA. In July 2011, the courts found a tax preparer guilty on 134 counts of tax evasion under the Income Tax Act and four counts under the Tax Rebate Discounting Act. According to court records the tax preparer claimed or obtained $393,504 in false income tax refunds by filing fraudulent returns for 134 clients. Not only did the tax preparer have to repay the total amount of tax evaded, he had to pay a fine of $393,504 (100% of the evaded amount) plus an additional $2,000 on the four counts under the Tax Rebate Discounting Act. He was also sentenced to house arrest for two years less a day. The preparer was allowed to pay the fine in installments over five years. Failure to comply will result in a jail term in excess of two years.

The courts also found three other persons party to the scheme. Their sentences were as follows:

1. Nine months in jail and a $286,000 fine
2. Three months in jail, six months’ probation and a $36,000 fine
3. Three months in jail and a $36,000 fine.

3. Electrical Contractor Fined

An electrical contracting company was convicted of one count of evading GST and one count of income tax evasion. The company had claimed $379,705 in non-business expenses between 2004 and 2006 as well as construction expenses associated with building two cottages for company directors. Input tax credits for GST of $24,007 related to the cottage expenses were also claimed as business expenses. The company was fined $165,822, an amount equal to 200% of the total amount evaded and given one year to pay.

4. Inflated Business Expenses

For the years 2005 through 2007, a taxpayer failed to offset credit notes against purchases, claimed invoices twice, indicated that personal expenses were business expenses and claimed expenses for which receipts or other documents were not available. The cost to this taxpayer was more than $49,000 after charges of tax evasion were upheld by the courts. The $49,000 fine represented 80% of the federal tax evaded. In addition, the taxpayer will have to pay the taxes owed plus any interest or penalties assessed.

5. False Invoicing Scheme Costly for All Involved

Three business associates cooked up a false invoicing scheme in which, over a two-year period, invoices from Company A billed Company B for costs associated with building a personal residence for Company B’s owner. Company B was then able to reduce the corporate income by $165,000. As well, the owner of Company B failed to report the benefit received from payment of the construction cost. This resulted in tax evasion approximating $45,000. The courts fined not only Company A and Company B but also the principals involved in the scheme. The total amount fined exceeded $105,000. As well, the companies and principals were ordered to repay the taxes owing along with interest and penalties.

If You Think You Might Not Be in Compliance

Chartered accountants deal with the CRA on a regular basis and find that in the normal course of business the CRA is fair when dealing with professionals and their client base. The CRA, like most businesses, would prefer that taxpayers meet their obligations voluntarily because investigations resulting in settlements tie up personnel, clog the courts and, of course, cost taxpayers money. This is why the CRA suggests that taxpayers who have inadvertently failed to report all of their income from prior years may be able to avoid such penalties and potential jail time if they comply before any action is taken by the CRA.

If you think you may not be in full compliance with current tax legislation, ask your chartered accountant about the Voluntary Disclosure Program or visit the CRA website ww.cra.gc.ca/voluntarydisclosures.

This was put out by the ICABC this week.

Lindalee Brougham, FCA

“WOW,” says Lindalee Brougham of her election to Fellowship. “I’m amazed that I was noticed by others. It is very humbling. I think it’s unusual for sole-practitioners to be recognized, and I hope this helps raise the awareness for others.”

Lindalee is the principal of LL Brougham Inc., Chartered Accountant in Victoria, which she launched in 2000. She also co-owns a prototyping machine shop with her husband, Ray Brougham, that builds medical, research, scientific, military, and other equipment and prototypes.

Helping and working with others are her biggest rewards, she says. “Between the accounting practice and the machine shop, we put food on a lot of tables. That is pretty exciting and humbling—we need to continually strive to look to the best interests of the businesses and the people in them, and of those we serve. I am also blessed that I get to develop future accountants within my team, and together we get to learn new things.”

In addition to mentoring others, Lindalee has contributed to the accounting profession as a member of the ICABC’s Exposure Draft and Small Firms forums, and as an ongoing member of the Practitioner’s Emergency Assistance Committee. From 2007-2011, she also served on Council.

Her community activities have also been extensive. Current contributions include chairing the board of directors and the steering committee for the Victoria International Airport Authority, and serving on the board of the Victoria Police Department. In 2011, Lindalee also joined the board of the Union Club of Victoria, becoming one of only a few women to have served in this capacity.

Past contributions include six years of service on the board of the Canadian Homebuilders Association, during which she became the first female chair in the Association’s history. She also served for seven years on the board of the Greater Victoria Chamber of Commerce (which included a term as chair), and championed initiatives such as the formation and launch of a Regional Economic Development Agency, where she served as strategic leader. Thus far, the Agency has brought in over $15 million in new investment to Victoria.

“When I first started board work it was to help market the business,” Lindalee says. “Now I love learning about the different parts of our community and how they work. There is so much to learn, and I’m thankful for the opportunity.”

Her achievements have garnered her numerous awards, including the Maple Leaf Award for BC, the Executive Achievement Award for Victoria (both in 2006), and the President’s Award (2004) from the Canadian Home Builders Association. In 2006, Fast 25 named her firm one of the “Top 25 Fast-Growing Companies on Vancouver Island Under $1 million.”

She attributes much of her success to her family and her community.

“My husband and I have been married for over 26 years, and he is my best friend and biggest supporter; my parents are fabulous; and my team at work helps to pull it all together,” she says. “I cannot do the things I do without these people—life is a team sport, and I have the best team.”

Lindalee began her public accounting career as a CGA, and became a CA in 1999. She also holds a certified financial planner designation, an ICD.D designation from the Institute of Corporate Directors, and an MA in conflict analysis and management from Royal Roads University.