Celebrity Tax Fraud: 5 Things Accountants Should Do Right Now
SARS recent enforcement actions against celebrity chef Lusizo Mvula Henna, DJ Ganyani, and fashion director Candy Smith shed light on the stark consequences of fraudulent activities and tax non-compliance.
However, what role did the bookkeepers, accountants, and tax practitioners of these taxpayers play in aiding or preventing the tax offences? Did they inadvertently facilitate these violations or if they had the opportunity to deter the onset of tax evasion and unresolved tax debts, what did they do?
Chef Sizo's Scandal: A R5 Million VAT Fraud Unravels in Johannesburg Court
Celebrity chef Lusizo Mvula Henna, also known as Chef Sizo, has been embroiled in a significant legal scandal involving tax fraud and money laundering charges. The charges stem from a fraudulent R5-million VAT claim submitted through his business, Blaque Olive Private Chefs CC. Henna rapidly spent over R3 million of this money, distributing significant amounts to his wife, mother, and ex-wife within 14 days of receiving the funds. This case unfolded in the Johannesburg Specialised Commercial Crime Court in Palm Ridge and was postponed to April 2024 to considering sentencing.
DJ Ganyani Faces the Music: SARS Demands R4 Million in Unpaid Taxes
DJ Ganyani, whose real name is Frederick Tshabalala, is under pressure from the South African Revenue Service (SARS) to pay R4 million in unpaid taxes. SARS threatens potential civil action, including the possibility of selling Tshabalala’s personal assets at auction if he does not settle the debt or agree to a payment plan.
According to News24, SARS offered Tshabalala several remedies to address his tax debt: from installment payments; suspension of the debt if the charges will be dispute; or seek a compromise for a portion of the tax debt to provide a higher return than would result from liquidation or other collection measures. Failure to engage with these options could lead Sars to obtain a court order allowing for the attachment and sale of his assets to recover the debt. Sars can also direct any third party owing money to Tshabalala or holding funds on his behalf to settle the debt directly with those funds.
Fashion Mogul Fined for False Tax Filings
News24 reported that Candida Crystal Smith, a 46-year-old prominent fashion creative director from Bloemfontein, has been handed a suspended sentence by the Bloemfontein Magistrates’ Court for tax offenses. The court’s decision, made in February 2024, follows an investigation by the Bloemfontein Hawks’ Serious Commercial Crime Investigation team alongside the South African Revenue Service (Sars).
Smith was found guilty of fraud and violating the Tax Administration Act 28 of 2011, due to submitting false tax returns for the 2019 to 2020 period, causing a loss of approximately R472,701 to Sars. The court offered her a choice between paying a R300,000 fine or facing three years of imprisonment. Additionally, she must repay the remaining amount by 2029. The sentence is fully suspended for five years on the condition that Smith commits no similar offenses during this time.
Accountants: Aiding and abetting, or holding the ethical and professional line
Considering the intricate and significant nature of the tax violations associated with the cases of celebrity chef Lusizo, DJ Ganyani, and fashion director Candy, the public may rightly question the role of the celebrities’ bookkeepers, accountants and tax practitioners, either through direct involvement or due to a failure in performing due diligence when performing work for their clients.
The roles of these professionals are under scrutiny, given their expertise and deep understanding of the tax system and its complexities.
These professionals are equipped with the knowledge necessary to navigate through the labyrinth of tax laws, raising concerns that this expertise could be used to exploit loopholes for illicit financial gain.
The incidents bring to light the broader issue of accountability among professionals when it comes to ensuring compliance and ethical conduct in tax matters.
It underscores the critical need for stringent regulatory oversight by professional bodies, adherence to professional engagement standards, and the reinforcement of ethical standards within the accounting and tax professions.
5 Things accountants and tax practitioners must do right now
Accountants and tax practitioners should immediately implement the following measures to safeguard their professional reputation by ensuring their clients abide by the law and are kept safe from unnecessary scrutiny by the South African Revenue Service (SARS):
Know your clients business: Accountants should deepen their understanding of a clients' business and financial activities before accepting an engagement, ensuring they have a comprehensive overview of the business model and operations. What is reflected in tax returns should be consistent with the accountants knowledge of the business.
Strengthen Documentation and Record-Keeping Practices: Implement rigorous documentation practices to maintain detailed records of all financial transactions, tax filings, advisory communications and working papers. This not only aids in ensuring accuracy and compliance with tax laws but also provides a solid defense mechanism should SARS inquiries arise.
Regularly Update and Educate Clients on Tax Laws: Keeping abreast of changes in tax legislation and communicating these changes to clients is essential. Accountants should provide regular updates and guidance on how new laws affect their financial and tax planning, emphasizing the importance of compliance and the risks of evasion or fraud.
Adopt a Proactive Tax Planning Approach: Instead of reactive tax filing, accountants should work with their clients to develop forward-looking tax strategies that align with legal requirements and optimize tax positions. This involves advising on legitimate tax saving opportunities while steering clear of aggressive tax avoidance schemes that could draw SARS's attention.
Encourage Ethical Financial Practices: Foster a culture of integrity and ethical behavior in financial reporting and tax filings. Accountants should emphasize to their clients the long-term benefits of honesty and transparency in their financial dealings, outlining the potential legal and reputational risks associated with fraudulent activities.
By adhering to these measures, accountants can play a pivotal role in guiding their clients through the complexities of tax compliance, significantly reducing the risk of SARS scrutiny and the subsequent legal and financial repercussions witnessed in the cases mentioned.
Why accountants apply standards when compiling financial statements and filing tax returns for clients
For a business like Chef Sizo’s, which primarily offers culinary services, the nature and scale of fixed assets required for the operation would be well known to an accountant or bookkeeper familiar with the business.
If Chef Sizo’s business did not purchase significant fixed assets, or if the nature of the purchases did not align with the operational needs of a culinary service, this would be a red flag for any VAT input claims made on such assets.
Understanding the client’s business thus directly impacts the ability to discern the legitimacy of VAT claims. For instance, claims for input tax on non-existent or unrelated fixed assets would immediately appear dubious to an accountant well-acquainted with the specifics of Chef Sizo’s operations.
Moreover, understanding the client’s business extends to recognizing the typical expenses that would qualify for VAT input claims. In the culinary industry, these might include kitchen equipment, ingredients for meals, and possibly vehicles for catering services. However, claims for items that do not directly contribute to the production or delivery of the culinary services offered, such as extravagant office furniture or personal vehicles, should raise concerns for an accountant or bookkeeper grounded in the realities of the business.
This comprehensive understanding also enables the financial professional to question the timing and proportion of VAT claims. For example, a sudden, large claim for VAT input on fixed assets at a time when the business is not expanding or upgrading its operational capacity could indicate fraudulent activity.
Similarly, if the business reports high expenses for perishable goods far exceeding what would be expected given the number of events catered or meals sold, this discrepancy would suggest a need for closer scrutiny.
The crux of this argument is that a thorough understanding of Chef Sizo’s business not only encompasses an awareness of the types of expenses that legitimately qualify for VAT input claims but also includes a grasp of the operational scale and nature of these expenses. Such understanding forms the bedrock upon which the integrity of financial reporting is maintained, allowing accountants and bookkeepers to effectively safeguard against the misreporting or fraudulent claiming of VAT inputs.
Failure to apply this principle not only contravenes professional standards such as ISRS 4410 and the CIBA Tax Standards but also undermines the very trust and reliability the profession seeks to uphold.
ISRS 4410 and understanding your clients business
ISRS 4410 is a standard issued by IFAC for accountants conducting compilation engagements, where the goal is to prepare financial statements without providing assurance on them. The standard requires accountants to apply professional judgment and ethical considerations, understand the client’s business and financial reporting framework, and compile financial statements based on information provided by management.
It emphasizes that the accountant must prepare and keep clear documentation of work.
Although the ultimate responsibility for the financial statements rests with the client, the accountant must judge if the information received from the client to compile the financials, make sense. If the information does not make sense then the accountant must issue a negative report. The standard ensures accountants provide a service that is both professional and in accordance with the applicable financial reporting framework.
CIBA Tax Standards
Applying the CIBA Tax Standards practically to the case of celebrity chef Lusizo Mvula Henna's fraudulent VAT claim, here's how specific standards, if adhered to, could have prevented the tax fraud:
STS 110 - Ethics and Ethical Constraints: Ethical behavior would have required the tax practitioner to refuse participation in or reporting of fraudulent VAT claims. For example, recognizing that Henna's business did not have the necessary fixed asset purchases that would justify the VAT refund claims, an ethical practitioner would either have advised against such claims or refused to process them.
This Case directly relates to ethics because it embodies the principles of integrity, responsibility, and due diligence that are central to ethical conduct in the tax profession. Professional skepticism is a key ethical behavior as it reflects a commitment to truth and fairness in financial reporting and tax compliance. By critically assessing client-provided information for accuracy, tax practitioners are actively working to prevent and identify potential fraud or errors, thereby protecting the interests of all stakeholders, including the public, regulatory bodies, and their clients.
STS 120 - Personal Competencies and Skillset: A skilled tax practitioner aware of the intricacies of VAT laws would understand that VAT refunds are contingent upon legitimate business expenses. Given Henna's type of business, the practitioner should have known that the scale of the claimed VAT refunds did not align with typical expenses for a culinary business, indicating a potential fraud.
STS 130 - Non-compliance with Laws & Regulations: Recognizing the illegal nature of submitting fraudulent VAT claims, a practitioner adhering to this standard would have prevented the submission of such claims by either advising the client against it, declining to be complicit in the act, and reporting the activity to the Financial Intelligence Centre.
STS 210 - Client/Engagement Acceptance and Continuation: Prior to accepting Henna as a client, a thorough risk assessment could have unveiled red flags regarding the integrity of his financial dealings. For instance, if Henna had insisted on claiming VAT refunds for non-existent purchases, a diligent practitioner would have reconsidered continuing the engagement.
STS 220 - Quality Deliverables: Ensuring the accuracy and legality of financial documents submitted to tax authorities, a practitioner could have prevented the fraud by verifying the authenticity of Henna's claims for VAT refunds. Any discrepancies or unsupported claims should have halted the submission process.
STS 410 - Evaluation Need for Involvement of External Specialist: Recognizing the complexity and the potential legal implications of Henna's VAT refund claims, a tax practitioner adhering to this standard might have sought the advice of a tax law specialist. This could have provided an external viewpoint highlighting the illegality and consequences of the fraudulent claims.
In essence, had the tax practitioners involved with Henna's finances rigorously adhered to these SAIBA Tax Standards, they would have had multiple opportunities to identify red flags, advise against the fraudulent activity, or disengage from providing services that facilitated the tax fraud. Each step, guided by these standards, could have served as a critical checkpoint to prevent the progression of fraudulent activities.
CIBA's Tax Standards are a set of guidelines designed to ensure that its members adhere to the highest levels of professionalism, and ethical conduct in tax practice. These standards emphasize the importance of maintaining professional competence, exercising professional skepticism, and ensuring compliance with relevant tax laws and regulations. Members are expected to critically assess and verify the accuracy of client-provided information, remain up-to-date with their tax law knowledge, and only undertake assignments within their area of expertise.
By following these standards, CIBA members contribute to the transparency, reliability, and fairness of the tax system, thereby upholding the trust placed in them by clients and regulatory bodies alike.
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