Are you audit ready?

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The best way to survive an audit is to be prepared, writes Stephanie McGrath

Each State and Territory in Australia has its own Act governing pharmacy ownership in respect of pharmacy businesses located within that State or Territory (Pharmacy Legislation).

While each Pharmacy Legislation differs slightly (e.g. regarding the number of pharmacies a person can have an ownership interest in, who can have an ownership interest and what constitutes having an ownership interest) essentially what all Pharmacy Legislation has in common is its general purpose, being:

  • to provide for the regulation of pharmacy and pharmacy-related businesses (e.g. departments and depots);
  • to maintain public confidence in the pharmacy profession; and
  • to establish the respective State or Territory Pharmacy Regulator (Pharmacy Regulator).

One of the main roles of the Pharmacy Regulator in each State and Territory is the administration and enforcement of Pharmacy Legislation.

Since 2018 we have seen Pharmacy Regulators review their practices, procedures and (following recommendations) focus their audit powers on detection of unlawful ownership interests[i] in pharmacy businesses and non-compliant or unreported commercial arrangements.

What can happen if an audit is not satisfactory?

Any registered pharmacist who has an ownership interest in a pharmacy business, must ensure that the pharmacy is conducted in accordance with the Pharmacy Legislation.

A person must comply with the Pharmacy Regulators’ information requests made under and in accordance with the applicable Pharmacy Legislation and must not mislead the Pharmacy Regulator when giving the information.

Penalties for failure to comply or for providing false or misleading information vary across Australia but nonetheless are significant.  For example, in Victoria a failure to comply with information requests results in a fine of 60 penalty units for a natural person and 300 penalty units for a company. In Western Australia, providing false misleading information can have criminal sanctions including 2 years imprisonment, whereas a similar offence in Queensland has a penalty of 50 penalty units.

Where the pharmacist is found to be guilty of an offence, the Pharmacy Regulator may revoke the pharmacist’s business licence or refuse to grant a pharmacy business licence.

How do you prepare for an audit?

If you have not kept proper records or documents are not well-drafted, an audit by a Pharmacy Regulator can be expensive and time consuming (sometimes taking several months!).

Time is not something many pharmacists have to spare when you would prefer to be in your pharmacy serving the community, especially during COVID times.

However, it doesn’t have to be that way.

The best way to survive an audit is to be prepared which means:

  • seeking legal advice from the outset and before purchasing your pharmacy or changing business arrangements;
  • checking your records are in order;
  • ensuring your business arrangements have been properly documented; and
  • engaging a lawyer with experience in pharmacy audits to review your business arrangements or proposed business arrangements.

Based on my experience with audits across Australia, the following are examples of common issues and good areas to begin your review.

How many pharmacies do you actually have an interest in?

A person is lawfully permitted to have an interest in 5 pharmacies in Queensland, New South Wales and Victoria; 4 in Western Australia and Tasmania; 6 in South Australia; and an unlimited amount in Northern Territory and the ACT.

If you use a company or trust in connection with the ownership of the pharmacy seek advice before making changes e.g. varying the people who are appointed to certain roles in those entities or nominated as beneficiaries in the trust.

Not only will these changes need to be notified to the Pharmacy Regulator and where applicable, constitute a change of ownership (requiring the appropriate application to be made), they can inadvertently put the appointed person in contravention of the Pharmacy Legislation (not to mention potential tax and duty consequences – but that’s for another day!).

Changes to commercial arrangements or business details

Consider whether since the date of receiving a pharmacy business licence any of the following has occurred that has not been properly notified to the Pharmacy Regulator as required:

  • Change to company details;
  • Trust Deeds being varied including change of terms, changes to beneficiaries or classes of beneficiaries, changes to the trustee or appointor;
  • Services Agreements being entered into or varied;
  • Franchise Agreements or similar being entered into or varied;
  • Licence or lease agreements being entered into or varied;
  • Premises upgrades;
  • Change of business name;
  • Relocations (even within the same building); or
  • Change of street address or unit number despite no relocation.

You should immediately review your records and ensure that any such changes have both been properly documented and notified to and/or approved by to the relevant Pharmacy Regulator, if required.

If you have not notified the Pharmacy Regulator, consider seeking expert legal advice regarding what information needs to be notified and how to approach the Pharmacy Regulator if there has been a delay in providing the information or notification.

Service Arrangements

It is not uncommon for pharmacy owners to:

  • utilise a ‘service entity’ in connection with operating the pharmacy e.g. to provide staff, book-keeping services and other services to the pharmacy; or
  • to sublease the pharmacy premises from another entity e.g. a pharmacy within a medical centre where the owner of the medical centre leases the whole of the building.

The service entity is usually a related company. That is, a company of which the pharmacist owner is the director. However, that is not always the case.

Whatever the situation, problems arise where pharmacy owners do not obtain advice from a team of accountants and lawyers who have pharmacy-specific experience.

As a result, company constitutions, trust deeds, service agreements and sub-leases (if they are even drafted!) can be prepared without a suitable understanding of the Pharmacy Legislation.

To be prepared for an audit, ask yourself:

  1. Have you documented the service arrangements between the pharmacy owner?
  2. Are services being carried out and paid for in compliance with those documents service arrangements?
  3. Did you disclose the service arrangements as and when required to the Pharmacy Regulator?
  4. Did you obtain legal advice at the time confirming any company constitution, trust deed, service agreement or sub-lease complies with the applicable Pharmacy Legislation?

If the answer to any of these questions was ‘no’, you should be seeking advice immediately. Once an audit commences, it becomes more difficult to unwind the problems that have been created by messy, complex or fundamentally flawed structures.

Member or Brand Agreements

Recently, many brand agreements (despite being in the same form as previously approved by Pharmacy Regulators for separate transactions) have come under scrutiny of various Pharmacy Regulators, resulting in the process for approval to change ownership being extensively drawn out and inevitably delaying settlements significantly.

No brand is safe from possible contraventions of the Pharmacy Legislation, no matter how little known or well-known that brand is.

If your Member or Brand Agreement is coming up for renewal, or you are planning to enter into a new Agreement (e.g. you are re-branding or purchasing a pharmacy) it would be a good idea to have your current agreement or proposed new agreement reviewed by a lawyer with expert knowledge of the Pharmacy Legislation.  Such lawyer should also have significant familiarity with the requirements of the Pharmacy Regulator in order to properly identify any possible contraventions of the Pharmacy Legislation.

Even where it found the Agreement complies (great!) it is always wise to have Member or Brand Agreements reviewed from a legal perspective before committing to them. My article 5 Hidden Pitfalls In ‘Standard’ Franchise Agreements explores common pitfalls in these types of agreements.

What do you do if you are audited?

First, don’t panic. The audit process doesn’t have to be scary.

Second, immediately contact a lawyer with experience in pharmacy audits. There is always a time limit to provide your response, so do not delay in seeking advice.

Your lawyer will be able to advise you on your rights and obligations, the extent of the Pharmacy Regulator’s powers and merit in the requests for information, and conduct a review of your pharmacy business arrangements to identify any areas of concern (and if problems are identified, propose solutions).

If you have impeccable records and have already had an expert lawyer review your pharmacy business arrangements, the audit process should be quick and painless.

If the audit has already commenced and you have not reviewed your pharmacy business arrangements, it’s not too late to find a solution to any identified problems. However, those problems could have been avoided altogether if you were proactive.

Further information

If you require any specific information or assistance to protect your interests, please do not hesitate to contact the writer on 0488 00 24 24.

Stephanie McGrath is a Senior Legal Advisor practising in commercial law with a focus on health, business and property across Australia.

Stephanie’s significant pharmacy experience includes assisting pharmacy owners in responding to audits and investigations, buying and selling interests in pharmacies Australia-wide, advising clients in relation to compliance with the requirements of different State and Territory Pharmacy Regulators, applications to Medicare, applications and objections under the Pharmacy Location Rules and Ministerial Discretion Process, partnership disputes and much more.

Disclaimer: The content of this article is intended only to provide a summary and general overview on matters of interest. It is not intended to be comprehensive nor does it constitute legal advice. You should seek legal or other professional advice before acting or relying on any content of this article.

[i] The term ‘ownership interest’ used in this article is not a defined legal term. What constitutes having an ‘ownership interest’ differs between the respective Pharmacy Legislation. In some cases, what constitutes an ‘ownership interest’ is not straight forward. Therefore, expert knowledge of the legislation applicable to the State or Territory in which the pharmacy is located and complex legal interpretation skills are required.

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