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GovGrant urges separation of audit and consultancy in order to embrace contingent fees for consultancy services

The CEO of one of the UK’s leading innovation tax specialists has called for contingent fees to be fully embraced by clients seeking the best possible outcome for their R&D and innovation tax credits strategy. Luke Hamm, CEO of GovGrant, which specialises in helping firms claim tax credits from their innovation and Intellectual Property, which is then re-invested, said that contingent (or success fees) were a better means of deriving full value from a claim than fixed fees or hourly rates.

“Contingent fees mean the R&D consultant is outcome focused, whereas under a fixed fee arrangement consultants will charge larger companies for research and review work, creating an incentive to pad out the time taken to build a claim, but no incentive to maximise the value of the claim. It means fixed fees become a very expensive way to charge for an uncertain outcome and lack integrity as a result.”

He added: “Of course it is important, when making a claim, to thoroughly research the business, but what really matters is for the tax specialist to have a deep understanding of the legislation and guidelines, and to be prepared to share the risk (and thus wear the costs of the claim) with their client with the reward of a successful outcome.”

“The difficulties of managing internal charging, transfer pricing, IP ownership and understanding the group structure of larger companies makes fixed fees doubly expensive and won’t necessarily lead to a successful claim, whereas a success fee is a means of gaining cut through because the client pays on outcome, and not for navigating through internal politics.

Luke explained that no win/no fee and contingent fees are common in other professional services, especially civil justice, or reclaiming tax, where there is a level of uncertainty, or it’s hard to identify the expected benefit.

But, he said: “Thanks to the more recent phenomenon of ambulance chasing claims farmers (and some law firms), no win no fee is perceived as unscrupulous, and some accounting firms avoid charging contingency fees altogether.”

He argued that this has been exacerbated by global accounting scandals such as Enron, WorldCom, AIG and Freddie Mac in the US, and more recently, Carillion and Patisserie Valerie in the UK, where attention has focused on conflicts of interest in respect of audit and consultancy among the big four accounting firms.

He said: “Accounting regulation has evolved and developed as a result of these scandals and although contingent work is permitted, there is – rightly – strict guidance on conflict of interest and how they should be managed. He explained that regulation needs to champion contingent fees where there is a demonstrable benefit to clients, such as innovation tax credits, however, the past behaviour of the big four has created a paradox in tax consultancy which risks client detriment.

“If an auditor is also doing contingent work, their fee needs to be modest, not material to avoid risk or unnecessary bias in the audit, so the bigger firms choose to undertake contingent work on a fixed fee basis rather than payment by results. The result is the client doesn’t get a successful claim or a claim which undervalues the extent of innovation in that business.”

Luke said that this paradox was another reason while policymakers should press ahead and split audit from consultancy work, but noted: “The big four are judge and jury when it comes to audit risk and tax because government consults them and this enables them to control the regulatory framework.”

“Accounting scandals come and go but nothing seems to change, because the big four don’t want to change. Their complex corporate structures mean unwinding their audit and consultancy would be difficult. In summary, and despite a litany of costly scandals in the last twenty years, meaningful change is still in the ‘too hard’ basket for policymakers.”

Company Date Cost Comment
Enron (US) 2001 $74 billion of shareholder funds Enron Auditor Arthur Andersen collapsed
World Comm (US) 2002 Investor losses of $180 billion, 30,000 job losses Company inflated value of its assets. Internal audit team found a $3.8 billion fraud
Tyco (Swiss) 2002 Tyco paid nearly $3 billion to investors following a lawsuit CEO and CFO inflated the company income by $500 million so that they could steal $150 million
AIG (US) 2005 AIG fined $10 million in 2003 and $1.64 billion in 2006 $3.9 billion fraud by CEO through share price and bid rigging
Lehman Bothers (US) 2008 $50 billion of losses hidden as sales Fraud uncovered after the bank was bankrupted
Olympus (Japan) 2011 A $1.7 billion fraud uncovered by the CEO Olympus’s previous management had buried losses for 13 years
Tesco (UK) 2014 Overstated profits by £234 million CEO resigned, £6.4 billion loss reported in 2016
Toshiba (Japan) 2015 Overstated profits by $1.22 billion between 2008-15 CEO and 16 executives fired
BHS (UK) 2015-2018 Sir Phillip Green sells BHS for £1 after taking out high dividends and selling property to his wife 11,000 job losses after administration and uncertainty for 20,000 pensioners
Carillion (UK) 2018 Compulsory liquidation with debts of £1.5 billion Board pilloried for lack of oversight of annual reporting and accounts
Patisserie Valerie (UK) 2019 £20 million black hole and unreported overdraft of £10 million uncovered Compulsory administration and thousands of job losses
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