9.1 Understand legal considerations in business and accounting
Rina Dhillon
There are usually three legal considerations in business and accounting: (1) Sources of Law; (2) Contracts and (3) Consumer Protection. This section will briefly address each of these legal considerations and its implications for business.
Sources of Law
There are two main sources of law in Australia, statutory law, the law made by Parliament, and case law or common law, based on the decisions of judges in the superior courts. The dominant source is parliament, where elected politicians make laws. Laws made by parliaments are called statutes, Acts or legislation. Australia has a federal system of government. There is the Commonwealth Parliament (in Canberra) and a separate parliament in each of the states and territories. All parliaments make laws.
There are also two court systems. The federal court system comprises the Federal Circuit Court, Federal Court, Family Court and High Court. The state court system consists of Magistrates’, County and Supreme Courts. As well, there are a range of tribunals and boards that make decisions about individual disputes, but they do not have the same power as courts to ‘make law’. For example, in the New South Wales, the NSW Civil and Administrative Tribunal provides affordable access to justice for civil matters. Judges make law through their decisions in court cases. Judges usually decide each similar case along the lines of earlier decisions made. If the facts of the earlier cases were not exactly the same, the judge could still compare the situations and apply a common principle or develop a new, reasonably similar principle for the new facts – known as the doctrine of precedent. The principles and rules contained in the collection of judgments and court procedures is also known as the common law. Each part of the system – the courts, the parliament and the executive (ministers and public service) – has a separate role to play. In particular, the courts are independent of the parliament.
These sources of law fit together to create the Australian legal system. Students who would like a more in-depth understanding of the sources of law in Australia can turn to the following optional reading resource: The Australian Legal System.
Contracts
A contract is a promise (or a set of promises) that is legally binding and can be anything from a formal written document to a verbal promise, as well as implied by conduct. Contracts reflect the set of expectations of each party within a business relationship. A business is essentially a ‘nexus of contracts’ and thus contract law is applicable and relevant, especially in the event of a breach.
Contract law defines the elements of a contract (i.e. contractual formation -what we need to do to create a contract ), determines if contracts are valid and enforceable (i.e. scope and content of contracts), aids with the interpretation of contracts (i.e. avoidance of contractual obligations or performance and termination of contracts – if they are unclear or there is a dispute) and determines what happens if contracts are breached (i.e. remedies for breach of contract – when one party fails to act out a promise).
Students who would like a more in-depth understanding of contract law can read the following optional resource: Australian contract law
Consumer Law
Since the early 70s, consumer legislation has seen a major shift from buyer beware to seller beware particularly for large organisations selling goods and services to a multitude of customers. The relevant legislation is the Competition and Consumer Act 2010 (Cth) (CCA) and is enforced by the Australian Competition & Consumer Commission (ACCC). The provisions within consumer law can be grouped into four broad categories:
- Product safety provisions, which provide for mandatory consumer standards, product information and notification of voluntary recalls, and the power to order mandatory recalls;
- Prohibitions against unconscionable, misleading or deceptive conduct in trade or commerce, which are extremely wide-ranging;
- A prohibition on the manufacture of defective products, which are restricted to consumer goods; and
- A strict liability prohibition on manufacturers and importers of defective goods.
Keeping It Real: ACCC takes action against Volkswagen over diesel emission claims
The Australian Competition and Consumer Commission has instituted proceedings in the Federal Court of Australia against German company Volkswagen Aktiengesellschaft (VWAG) and its Australian subsidiary, Volkswagen Group Australia Pty Ltd (VGA) (together, Volkswagen), alleging they engaged in misleading or deceptive conduct, made false or misleading representations and engaged in conduct liable to mislead the public in relation to diesel vehicle emission claims.
The ACCC alleges that between 2011 and 2015:
- VWAG engaged in misleading conduct by installing and not disclosing the existence and operation of ‘defeat’ software, which controlled the operation of the vehicles’ exhaust gas recirculation system. The software caused the vehicles to produce lower nitrogen oxide (NOx) emissions when subject to test conditions in a laboratory, but switched to a different mode under normal on-road driving conditions resulting in significantly higher NOx emissions being produced by the vehicles.
- Both VGA and VWAG engaged in misleading conduct by representing that the vehicles complied with Australian and European standards and all Australian regulatory requirements when, because of the defeat software, that was not the case.
- Using information provided by VWAG, VGA marketed the vehicles in Australia as being environmentally friendly, clean burning, low emission and compliant with stringent European standards when this was not the case under normal driving conditions.
“The ACCC alleges that Volkswagen engaged in multiple breaches of the Australian Consumer Law by concealing software in their vehicles to cheat emissions testing and misleading consumers about the vehicle’s compliance with standards and emission levels during on-road conditions,” ACCC Chairman Rod Sims said.
“Consumers rightly expect that their vehicle’s emissions would operate as advertised during their day-to-day use and we allege that this was not the case with more than 57 000 vehicles sold in Australia by Volkswagen over a five-year period.”
“These allegations involve extraordinary conduct of a serious and deliberate nature by a global corporation and its Australian subsidiary misleading consumers and the Australian public. We expect higher standards of behaviour from all companies that supply to Australian consumers,” Mr Sims said.
The ACCC is seeking declarations, pecuniary penalties, corrective advertising, findings of fact and costs.
Keeping It Real: Optus in court for allegedly misleading 20,000 customers about moving to the NBN
The ACCC has instituted proceedings in the Federal Court against Optus Internet Pty Ltd (Optus), alleging it misled customers about the need to move quickly from its existing HFC network to the National Broadband Network (NBN).
The ACCC alleges that between October 2015 and March 2017, Optus made false and misleading representations by writing to its customers to advise it would disconnect their HFC service within a specified time period as the NBN was coming to their area.
However, the timeframes were earlier than Optus was contractually allowed to cancel the customers’ services.
“We allege that Optus’ misrepresentations put pressure on customers to move to the NBN sooner than they were required to. This is particularly concerning as Optus received a significant financial payment from NBN Co for each customer that moved from its cable network to the NBN,” ACCC Chairman Rod Sims said.
It is also alleged that between October 2015 and September 2016, Optus misled some of its customers about their options for purchasing an NBN plan.
“Optus created the impression that its customers were required to obtain NBN services from Optus, when they could have chosen to switch to any internet service provider.”
“We are also concerned that Optus cut off some of its customers’ internet services when it had no contractual right to do so. Telephone and internet are essential utilities and it is unacceptable for Optus to treat its customers this way,” Mr Sims said.
“As the NBN rollout continues throughout Australia, people will be making decisions about which provider to go with. ISPs must not mislead consumers when competing for business. We are keeping a close eye on this sector and will take action where we see wrongdoing.”
The ACCC is seeking declarations, injunctions, pecuniary penalties, a publication order, compliance orders and costs.
In addition to goods and services, Australian Consumer Law also apply to Financial Products and Services. Failure by financial professionals to provide timely and accurate information to those they bear responsibility toward is also an offence. This includes false or misleading statements, inappropriate financial advice and insider trading and apply to financial statements, forecasts and other disclosures made by accountants, which are required to be a complete, true and fair reflection of the company’s financial performance. Investigations are brought by the Australian corporate regulator, the Australian Securities and Investments Commission (ASIC).
Keeping It Real:
21-063MR ASIC sues CBA for misleading conduct over monthly access fees
ASIC has commenced civil penalty proceedings in the Federal Court against the Commonwealth Bank of Australia (CBA), alleging that it charged monthly access fees to customers when it was not entitled to do so.
ASIC alleges that, between 1 June 2010 and 11 September 2019, CBA incorrectly charged monthly access fees to customers who were entitled to fee waivers because they met certain criteria under their contracts with the bank. Almost $55 million in fees were charged to nearly one million customers and more than 800,000 accounts.
For the period between 1 April 2015 and 11 September 2019, the period for which the Court can impose a penalty, ASIC alleges that CBA incorrectly charged monthly access fees on approximately 2.4 million occasions, totaling around $11.5 million.
ASIC alleges that CBA incorrectly charged monthly access fees to customers entitled to fee waivers due to systems and processes that were inadequate or improperly configured in 30 different ways, as well as due to manual errors made by CBA staff.
ASIC also alleges that each time CBA charged the fees or notified a customer via bank statement of the charging of each fee, it made false or misleading representations that it was contractually entitled to charge the fees when it was not.
Further, ASIC alleges that each time CBA entered into a contract with a customer to establish an account where a fee waiver may apply, it made false or misleading representations that it would have adequate systems and processes in place to provide the fee waivers, when it did not.
By engaging in the above conduct, ASIC alleges that CBA also engaged in misleading or deceptive conduct and contravened its obligation as an Australian financial services licensee to comply with financial services laws.
ASIC also alleges that CBA failed to provide financial services efficiently, honestly and fairly by:
- failing to apply monthly access fee waivers to customer accounts after it had represented it would do so;
- failing to maintain systems and processes that were capable of meeting obligations to customers; and
- failing to undertake an appropriate review of the multiple systemic issues that contributed to the ongoing failure of its systems to apply monthly access fee waivers in accordance with the bank’s contract with its customers.
ASIC commenced this proceeding because financial institutions need to have robust compliance systems to meet their obligations to customers. Financial institutions need to put customers first, and customers should have confidence that the banks they deal with charge fees correctly.
The proceeding will be listed for a case management hearing on a date yet to be set.
Keeping It Real:
21-364MR Mayfair 101 Group to pay $30 million penalty for misleading advertising
The Federal Court has ordered four companies in the Mayfair 101 Group to pay a combined penalty of $30 million for misleading advertising.
In March 2021, the Court found Mayfair Wealth Partners Pty Ltd and Online Investments Pty Ltd (trading as Mayfair 101), M101 Nominees Pty Ltd and M101 Holdings Pty Ltd engaged in misleading or deceptive conduct and made false or misleading representations when promoting the M+ and M Core Fixed Income Notes (21-055MR).
Mayfair 101 Group products were advertised in newspapers, on websites and via Google search advertising, when potential investors searched for terms such as ‘bank term deposits’ and ‘best term deposit’.
ASIC Deputy Chair Sarah Court said ‘This penalty makes clear that firms must do the right thing by their investors, irrespective of whether they are wholesale or retail investors. Failing to accurately advertise financial products can result in significant penalties for firms.’
The Court found that the Mayfair companies represented that:
- the Notes were comparable to, and of similar risk profile to, bank term deposits, when they were of significantly higher risk,
- the Notes carried no risk of default, when in fact there was a risk that investors could lose some, or all, of their principal investment,
- the principal investment would be repaid in full on maturity, when this might not occur because Mayfair could extend the time for repayment for an indefinite period, and/or
- the M Core Notes were fully secured products when they were not.
The Court imposed the following penalties:
- Mayfair Wealth Partners: $10 million
- M101 Holdings: $8 million
- M101 Nominees (in liquidation): $8 million
- Online Investments: $4 million
James Mawhinney is the director of each of the Mayfair companies. In April 2021, the Federal Court restrained Mr Mawhinney from advertising and raising funds through financial products for 20 years (21-076MR).
In handing down the decision, Justice Anderson found that, ‘the Defendants deliberately mislead investors into investing in the Mayfair Products under the belief that they would be of low risk when in fact the Mayfair Products were highly speculative and carried very substantial risk.’
His Honour also found that Mr Mawhinney had shown no remorse ‘for the loss and harm caused to investors in the Mayfair Products.’
The Court also permanently restrained the companies from using certain words and phrases (such as ‘term deposit’ and ‘certainty’) in any future advertising.
Students who would like a more in-depth understanding of consumer law can read the following optional resource: Australian Consumer Law
While this section has set out the legal expectations of businesses and accountants, they do not fully capture the scope of the accounting profession’s responsibility. The next section provides an understanding of the need for accountants to be ethical and independent.