Heads up Accountants – Don’t let Big Data act before you do!

Michael Chesterman November 13, 2018
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If you are an accountant and have clients operating in the building and construction industry then the 3 part series of insight from Michael Chesterman of Helix Legal is a must read for you.  Michael was the inaugural Compliance Manager for the then BSA and so has the ability to quickly identify pressure points in powers available to the regulator. If you would like to receive the entire series for accountants click here.

Big Data has the potential to supercharge the compliance and enforcement functions of the QBCC. When supporting licensed contractors in Queensland as accountants you should be mindful ‘Enormous Brother is Watching’ and this is the title of a previous article of mine.

In this article I identified that the QBCC had issued an Insights Driven Regulator-Strategy and Business Case Tender where it is stated:

“Through recent significant legislative reform the QBCC was given extended powers to enhance the integrity and probity of the building and construction industry. Consequently, this reform will rely heavily on data intelligence and analytics. A critical dependency to achieve the Government’s expectations for implementation of the new laws is the ability to be an “insights driven regulator”.

The tender has since closed and I have observed that in a recently published video entitled ‘Working Smarter’ the QBCC seems to have well and truly commenced its journey to becoming a insights driven regulator.  The QBCC has provided a very insightful update which is a positive move for the regulator but which means that you and your clients need to pay attention.

(Source: Working Smarter Queensland Building and Construction Commission)

There has been much commentary about new QBCC compliance and enforcement provisions under Building Industry Fairness (Security of Payment) Act 2017. However, in my view, one of the most impactful legislative provisions affording the QBCC the opportunity to investigate financially distressed contractors in this era of Big Data will be an old provision.

I have joined the dots together so that you can make the right checks to ensure any financial issues negatively impacting on the ability of your contractor clients, to meet possible liabilities in relation to building work, are promptly addressed before the Big Data makes a big reveal that you and your client overlooked.

Section 36 of the QBCC Act (formerly QBSA Act) allows for the QBCC to subsequently place conditions on a licensee after they are granted a license and states:

“(1) If the commission has reason to believe—

(a) that a licensee may have insufficient financial resources to meet possible liabilities in relation to building work; or

(b) that there is some other proper ground for imposing a condition on the licence; the commission may notify the licensee of the proposed condition and invite the licensee, within a period specified in the notice, to make written representations on the proposal.

(2) After considering the written representations (if any) made by the licensee, the commission, if satisfied that the condition is appropriate, may, by notice to the licensee, impose the condition.”

In undertaking its current compliance functions, the low threshold that applies to the use of section 36 provides the QBCC with a rapid ability to investigate financially distressed licensees.  The words “may have insufficient financial resources to meet possible liabilities in relation to building work” from my personal practical experience allows the QBCC to formally open up a dialog with contractors who may be just in the very early stages of experiencing financial difficulty.

To justify the use of section 36 and impose a condition on a contractor, I believe it may be that the QBCC need only identify through working smarter with data, any of the following things:

  • QBCC monies owed complaint;
  • adverse adjudication decision;
  • judgment debt against them;
  • commencement of any legal proceedings where they are a defendant/respondent;
  • significant QBCC defective works complaint lodged against them;
  • a debt to the ATO as reported to a credit bureau;
  • monies owed to suppliers outside trading terms;
  • a debt to the QBCC as a result of a statutory insurance scheme payout;
  • the lodging of a charge under the Subcontractors’ Charges Act by a subcontractor because of monies owed to them by a builder;
  • any relevant financial information the QBCC becomes aware of as a result of been a member of the Phoenix Taskforce;
  • any relevant financial information the QBCC becomes aware of as a result of data sharing arrangements with other government bodies; and
  • any relevant information the QBCC becomes aware of as a result of obtaining information from credit bureau’s.

Having established an entitlement to use section 36, there are many options available to the QBCC in framing suitable conditions to be imposed on contractors. There are some examples in this regard outlined under section 36.

However I am of the view that the most effective section 36 conditions are of a nature requiring the production of specific information from a contractor such as profit and loss statement, balance sheet, work in progress (WIP) details and the full disclosure of all contractual and legal disputes. An example of conditions that may be placed on a licensee can be seen here.

As the inaugural Compliance Manager the BSA (1996-2001) I regularly relied on section 36 to conduct investigations into the financial position of licensees.  An example as to how effective this provision was in assisting me to perform my duties as Compliance Manager can be found in the 2000/2001 Annual Report where it is stated:

“BSA monitored contractor payment trends through information received from suppliers, consumers and other contractors and determined whether reasonable grounds to start an investigation existed. During the year, the most significant matter of this nature involved Jezer Construction Group Pty Ltd (“Jezer”).

After a comprehensive investigation into the financial position of the company, BSA imposed conditions on its building licence. BSA concluded that the company had insufficient financial resources to meet possible liabilities in relation to building work.

The company sought a review of BSA’s decision in the Queensland Building Tribunal. BSA was satisfied the matter had been resolved when company directors pledged unlimited personal guarantees for proved debts owed by Jezer to its creditors including subcontractors and suppliers”

As accountants, I would expect that you will be the first port of call if a condition along these lines is placed on a licensee and my prediction is that with the regulator working smarter in the future you will see a sharp rise in such conditions being placed on your contractor clients.  

Having obtained and reviewed the information under section 36, the QBCC may decide to impose further conditions on your contractor client if considered warranted. Alternatively, the QBCC may switch their attention to determining whether the contractor meets the Minimum Financial Requirements for Licensing (MFR’s) as required under section 35 of the QBCC Act.

As you are likely aware, the Government has released a Discussion Paper on possible changes to the MFR’s and indicated that new and tougher requirements will be implemented and operate as from 1 January 2019.  

Regardless of the eventual position arrived at by the Government in terms of the composition of the new MFR’s, the power and very broad reach of section 36 must be your starting point for a conversation with your clients.  

Why?  

Because it puts into sharp focus the need for licensees to have sufficient financial resources to meet possible liabilities.  

My message to all accountants is that they really need to stress to their contractor clients the importance of having access to assets which can be readily converted into money so as to satisfy possible liabilities in relation to building work.

Furthermore, as evidenced by the message from the regulator in working smarter’, the QBCC is being open and transparent about how they intend to rely on ‘Big Data’ to drive their future compliance and enforcement agenda. The early detection of any of your contractor clients failing to meet their liabilities will no doubt be a main feature in this regard.

The regulatory framework in which your clients will operate next year and the financial pressures this will bring to light should not be underestimated by you.  I invite you to get on the front foot and don’t let one of my former colleagues point out an issue to your client that is right under your nose.

Not intended as legal advice. Read full disclaimer.
Michael Chesterman November 13, 2018

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