CPA review finds misdirection of funds, calls to freeze president's pay

CPA review finds misdirection of funds, calls to freeze president's pay

Initial findings of the review into CPA Australia cast doubt over the future of CPA Australia Advice, show the association was told to freeze the president's pay in 2016, and reveal a misdirection of funds in relation to marketing.

A review into the operations of CPA Australia, conducted by a panel chaired by former auditor-general Ian McPhee, has this afternoon released its preliminary report. The review was announced in mid-June, when the association was led by former chief executive Alex Malley and in the midst of a series of director resignations.

CPA Australia Advice 

The review found that CPA Australia had genuine intent to provide a licensing service that was in the best interest of members, given the looming expiration of the accountants’ exemption, which allowed accountants to provide SMSF advice without an AFSL until July 2016.

However, the review's findings that the uptake of CPA Advice has fallen short of business case forecasts is at odds with public messaging from CPA Australia, both during and after the reign of Mr Malley.

At a Senate hearing last week, both president Jim Dickson and director Graeme Wade, repeatedly rejected suggestions that the licensing arm is a failure.

In early June, Mr Malley told Accountants Daily that the early stages of take-up are in line with expectations, and that he had accepted from the outset that growing the advice arm would be a “long game.”

“The current financial performance of CPA Advice has been poor relative to the business case in regard to revenue, and substantial changes are likely needed to make CPA Advice viable in the medium to long term,” said the review.

Adding to the difficulty of getting members to convert to CPA Australia Advice, the review found the association did not take steps to evaluate elements of CPA Advice’s performance early enough.

“CPA Advice attempted to address some member concerns around cost in May 2017, when it reduced fees for its licensing options. However, from the documents and information the review panel has been provided, little action was taken outside of this to assess and address the drivers of CPA Advice’s underperformance,” the report said.

“More recently, and in response to the trend of low take up, costs have been reduced, primarily through a reduction in salaries with cuts to staffing.”

The review notes that, through cost reductions, CPA Advice has been able to reduce losses to less than those projected in the business case. This is a continuing focus for CPA Australia.

“In the financial year ending 31 December 2016, CPA Advice had a loss of $5.7 million for the year and a combined trading loss of $7.4 million since inception. This compares favourably to business case projections,” the review said.

The review also notes that CPA Australia was potentially too late to market with its advice offering, becoming available in April 2016, four months before the accountants’ exemption expired.

Further, and as suggested previously by Accountants Daily, the review found that CPA Australia’s business case for its licensing arm identified a number of key risks, including those related to professional indemnity insurance and lack of member engagement.

Governance in focus

The panellists noted that, back in 2006, members desired greater clarity around the governance framework of CPA Australia, saying that at the time it was poorly defined and lacks transparency. The report acknowledges the association made a substantial overhaul of its governance arrangements following these findings.

However, there remains the potential for the board to have a high level of influence over the association’s representative council. The representative council is responsible for appointing the CPA Australia board of directors.

“Under the constitution, the board has a number of links to the representative council. These links potentially give the board influence in the representative council’s composition, and create a connection between the board and the mechanism to appoint the board. The board’s influence also extends to the divisional council’s composition. For example the board may determine that any number of divisional councillors must be elected from a particular place or region,” the report said.

Interestingly, the review notes that this is not uncommon amongst professional member bodies, making particular note of Chartered Accountants Australia and New Zealand (CA ANZ).

“In the case of CA ANZ, the president and two vice presidents act as the connection between CA ANZ’s board and its equivalent to the representative council, the CA ANZ Council,” the report said.

The report recommended that the representative council’s composition be reviewed, to ensure it is meeting the requirements of independence from the board.

Member concerns about the appointment of former CPA divisional vice president for the ACT, Tim Youngberry, to the board as a casual vacancy were also addressed. The review panel says it is satisfied his appointment was made in accordance with the constitution, supported by legal advice.

Moving forward, CPA Australia should also consider exploring concerns and issues without the presence of management, the review panel said, and reconsider the appropriate number of further terms for the director and the president. 

Pay above expectations, benchmarks

The association has consistently defended remuneration of its key personnel, saying it is in line with the scope of the organisation and based on advice from independent and external remuneration consultants.

However, external consultants advised the review panellists that CPA Australia’s president’s remuneration, as well as that of its CEO, were above the expectations of members and those of benchmarked member-based organisations. Directors were within expected range.

The report also notes that, in 2016, the then chair of the nomination and remuneration committee had the current CFO benchmark non-executive director remuneration through an external party.

It was recommended at that time that president remuneration was above the recommended multiple of non-executive director remuneration, and should be frozen at current levels or reduced.

Further, the review found that the appointment of directors to the CPA Advice board did not follow the same procedure as CPA Australia.

“CPA Advice board appointment and remuneration did not follow the same procedure as CPA Australia. Candidates and remuneration were recommended by the former CEO in a meeting in February 2015. The former CEO ‘outlined the recommended candidates for the appointment to the board,’" the report said.

“The CPA Australia board, excluding those directors who were to sit on the CPA Advice board, then approved the appointment of five existing directors and remuneration of $100,000 per annum for chair and $70,000 per annum for directors.”

Members of the CPA Advice board also sit on the CPA Australia board. 

The review has so far recommended that CPA Australia use more appropriate benchmarks for remuneration, and that the CEO salary in particular be based on organisations relevant to CPA Australia’s context.

Marketing mismatch

Members have taken particular issue with the marketing strategies of CPA Australia, especially the CEO-centric approach taken under the reign of Mr Malley.

The review found that, consistent with CPA’s public comments, marketing expenditure as a proportion of revenue has been relatively stable. Further, it found that the association’s objectives and expenditure are consistent with comparable organisations.

However, in line with member feedback, prominent marketing activity choices - such as high profile sports sponsorships - caused tension amongst members, and depart from common practice of professional member organisations.

The review has also so far concluded that the brand building activities centred on Mr Malley has led to reputational risks for CPA Australia, and were contrary to the expectations of members.

Further, the review found that some activities may have been a misdirection of CPA Australia funds. This includes the ‘Naked CEO’ promotion in New York’s Times Square, airport promotion for the ‘Naked CEO’ and network selection for the television program ‘In Conversation with Alex Malley.’

Structural issues may have prevented appropriate checks and balances for the association’s marketing strategy, and led to Mr Malley having a “greater role in marketing than would otherwise be expected.”

“Discussions with CPA Australia employees have highlighted that the two most contentious marketing investments were closely owned, managed and driven by the former CEO. Employees express that the former CEO utilised the skills, relationships and resources of different teams to execute ‘In Conversation with Alex Malley’ and the ‘Naked CEO’ without involving general managers on a strategic level,” the report said. 

"As such, the panel said CPA Australia should consider a review of the organisation structure of marketing-related business units to fit within an overall organisational structure, according to the panel."

Looking ahead

Despite the scathing details of this report, the association is confident its renewal - beginning with an entirely refreshed board in January 2018 - will stabilise its standing with members, and the public reputation of the designation.

"The report is another important step as we carefully and methodically work through a process of reform and renewal, and hand over to a new board a strong and member-centric organisation. A number of the issues covered in the report have been addressed in recent months, and the findings will inform future changes," president Jim Dickson told Accountants Daily.

"The board commissioned the review to provide a robust, independent analysis of issues being raised by members and that is what has been delivered today,” he said.

These comments follow Mr Dickson's apology to members at a Senate hearing last week. He acknowledged the frustration felt by members during this period of significant change.

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CPA review finds misdirection of funds, calls to freeze president's pay
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