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corporate governance

This is part of a series examining corporate governance issues at Canadian companies

You may think doing your taxes is an expensive hassle. For Constellation Software Inc., however, it was a costly enough exercise that the company lost meaningful shareholder support for three of its directors this spring.

The situation at the TSX-listed company shines the spotlight on the issue of a company's auditors' fees, and whether its relationship with that outside firm can be compromised when it spends significant money on things other than the audit.

In Constellation's case, it paid KPMG $1.06-million in 2015 for the audit of its financial statements, but $2.39-million in fees for tax services. That means fees paid to KPMG for things other than the audit exceeded fees paid for the audit itself.

Proxy advisory firm Glass Lewis & Co. described those non-audit fees as "excessive," and recommended shareholders withhold votes for the three board members who sit on Constellation's audit committee. "This raises concerns about the objectivity of the accountants in conducting the audit," Glass Lewis wrote in the report to its clients this spring. "It is crucial that auditors are not beholden to management as a result of compensation they receive for non-audit work. When management and the auditor enter into significant financial relationships unrelated to the audit, the independence of the auditor and the integrity of the company's financial statements are compromised."

Constellation Software did not respond to The Globe and Mail's requests for comment, and KPMG declined comment, per its policy to not comment on client matters.

The Glass Lewis argument swayed some Constellation Software shareholders. Directors Paul McFeeters, Meredith (Sam) Hall Hayes and Robert Kittel had 10.60 per cent, 10.68 per cent and 13.87 per cent, respectively, of the ballots withheld from them in the April 28 vote. (In most corporate board elections, there is one slate of nominees, and shareholders must vote "for" the candidate or "withhold" their votes. There is no "no.")

Institutional Shareholder Services Inc., the other major proxy advisory firm, had no such objection to the situation, however. While ISS has similar policies about fees and an auditor's independence, it drew a line in the Constellation situation between fees for tax compliance and form preparation, and fees for tax planning or minimization strategies.

ISS said $1.99-million of the $2.39-million in Constellation's tax fees "relate principally to fees associated with assistance in respect of tax compliance requirements in various jurisdictions and investment tax credit filings."

Just $391,340 of the fees, ISS says, "relate to advice, planning and analysis, including services involving and related to transfer pricing, interjurisdictional matters, planning and due diligence matters related to business acquisitions and other considerations."

"Preparation of tax returns, we think, is a legitimate thing for an audit firm to do," says Marc Goldstein, head of the policy steering committee of ISS. "We don't consider that to be problematic, and we don't lump those in with other fees. But anything that relates to tax planning and strategy, tax shelters for example, that's more in the realm of consulting that's pretty far afield from the audit itself."

Glass Lewis, however, doesn't make the same distinction, viewing all fees paid for taxes, including tax compliance and tax credit filings, as potentially impairing the independence of the auditor. In 2013, Constellation paid more for its audit than for other KPMG services, but the tax bill exceeded the audit fees in 2014, and the margin grew substantially in 2015.

Glass Lewis also recommended withholding votes this spring on the measure ratifying KPMG as the company's auditor – but Constellation Software didn't disclose the vote results, saying instead "KPMG was reappointed as the corporation's auditors and the directors were authorized to determine their remuneration by at least a majority of shareholders on a show of hands."

Next spring, Constellation will disclose its 2016 fees to KPMG – and we'll see whether shareholders again express displeasure by holding individual directors accountable.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 28/03/24 4:00pm EDT.

SymbolName% changeLast
CSU-T
Constellation Software Inc
-0.81%3700

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