- Ransom or Fair Game? Pay Dispute Questions Holding of Client Files
- Who Should Own your Accounting File? Xero’s Position Hard to Defend
A minor dispute between an Australian skin-care company and its accountant over unpaid bills has unearthed a critical point about who should control your data stored in the cloud.
In the above example, the accountant refused to let the client transfer the online accounting software subscription to another accountant until the bill had been paid.
Coverage of the issue has divided readers. In one corner are accountants who invoke the medieval property law of lien – the right to withhold goods until they are paid for. In their eyes, refusing to hand over the subscription is a highly effective tactic in pay disputes.
In the opposite corner are business owners upset at the lack of control over their own accounting data because the software subscription is held by the accountant.
Cloud software vendors and accountants are split on the issue, although most seem to side with the business owners. Reckon, Intuit and MYOB will give owners control of the subscription if they fall out with their accountant. But the highest profile online accounting company, Xero, is siding firmly with the accountants and refuses to give owners control of the subscriptions unless their accountant agrees.
Why? It’s a hangover from the days of desktop software.
Accountants regularly place liens on desktop accounting files. It works like this: A business owner sends a copy of the accounting data file to the accounting firm so they can produce tax returns and company reports. The firm decides to exercise a lien by only handing over the updated file to the business owner once they receive payment.
Accounting associations agree that accountants have a right to exercise a lien on work they have carried out which hasn’t been paid for. However, they also clearly state that liens aren’t applicable to anything which isn’t a direct product of the accountant’s work.
“The fees for which the lien is exercised must be outstanding in respect of such work and not be in respect of other unrelated work (i.e. the documents retained must be particular to the outstanding fees),” says CPA Australia’s client relationship guide.
“The outstanding debt or demand must be connected to the property over which the lien is being claimed,” says the Tax Practitioners Board in its information sheet on claiming a lien over client property. “It is widely accepted that registered agents can only claim a lien over property upon which they have expended labour and made more valuable.”
The principle is shared internationally. “The fees for which the lien is exercised must be outstanding in respect of such work and not in respect of other unrelated work,” says the Institute of Chartered Accountants in England and Wales in its advice on ownership, lien and rights of access.
The practice of extending a lien breaks down, however, once the accounting software moves to the cloud. One of the great innovations in online accounting software is the single ledger – Xero ironically was the first to popularise it – where the business owner and accountant work on the same ledger in a web browser rather than the extra work and risk of maintaining double ledgers.
An unintended consequence of the single ledger is that it becomes impossible to distinguish related work from unrelated work.
This is best illustrated with the original story. To recap – a skin-care company decided to switch from a desktop accounting program to a rival online accounting program and paid an accountant to convert their file to the cloud.
Several months later the skin-care company received a bill for $20,000 which it decided to contest. The accounting firm, which took out the subscription on its client’s behalf, is allowing the company to continue using the file but is refusing to transfer it to another accountant until the bill is paid.
This is clearly a breach of conditions for a lien as outlined by the accounting and government associations above. The accountant is placing the whole online accounting file under a lien – even though it includes work performed by the client’s previous accountant in earlier tax years. The file also contains the business owner’s labour before and after the dispute with the current accountant, including new sales invoices, bills, bank transactions and so on.
The fact that Xero can’t yet see that its position is untenable is even more surprising given another great innovation it has pioneered – the ability to attach sales, contracts and other documents to transactions, bills and invoices.
“Australian courts have determined that a lien would attach over a general ledger, balance sheet and draft income tax return prepared by an accountant but it would not attach to a sales journal and invoices as these had been provided to the accountant for checking only and are not the result of the accountant’s labour,” the CPA Australia guide explains.
There’s also the question of privacy. The owner of the skin-care company was incensed that the accountant could see how much money he was making through sales invoices and bank transactions recorded by the software.
“How could you deny the guy the right to privacy for 2014 because of your 2013 lien?” says Michael Block of Block Tax, a Florida, US accountant who has researched the topic. “Technology has superseded the whole issue of liens.”
Xero’s supporters argue that business owners can still use their accounting software as normal even while the subscription is being held (and paid for) by a disgruntled accountant. “This is a storm in a teacup,” one accountant told me.
There is a larger point here about all types of cloud software. Many businesses allow IT companies to register subscriptions to cloud CRM, productivity, marketing and other programs on their behalf. This is clearly undesirable if it means the IT company, accountant or other third party has effective ownership of the data held within that cloud software.
Why is ownership of the data so important?
Let’s say that third party goes into administration or maliciously deletes the subscription and closes the account. What legal standing does the business owner have with the software vendor to retrieve the data when he or she hasn’t paid a cent directly to that vendor?
As far as accounting software goes, the answer could be none. And that’s clearly not good enough. Every business owner wants absolute legal right to their business data, period.
The potential to lose that data forever – unlikely, but possible – could have a catastrophic effect.
“If there is a genuine dispute about payment for services that is one thing, but I find (refusing to release a subscription) appalling and incredibly scary,” a businessman emailed me after reading about the skin-care company.
The moral of this story is that businesses should always have a direct relationship with their cloud software vendors. If your software subscriptions aren’t in your company’s name, you might not have full ownership of your own data.