Tax Research UK

It was good to be challenged about why we need much greater financial transparency to help developing countries by the IMF during an extended meeting with them on Friday.

The team from the Task Force on Financial Integrity and Economic Development  was able to address these issues, and clearly make the case. A number of explanations were offered.

First, greater transparency in developing countries will be of benefit in those places. Without data markets cannot operate effectively. If you do not know with whom you are dealing; if you do not know how they are using resources; if you cannot be sure entities can meet the claims made against them; if you cannot even be sure how you can register that claim, then quite clearly there is a significant risk premium within those markets that increases the cost of capital in those places. There is also substantial risk of the misallocation of resources, reducing the rate of return on capital, which has the same effective consequence. That means the cost of doing business in developing counties is significantly increased without full and open disclosure of what all entities other than natural persons are undertaking in these places.

Second, the maintenance of effective systems of regulation to prevent bribery and corruption, crime and the abuse of tax systems through transfer mispricing is not and cannot be claimed to be an internal matter which developing countries alone can tackle. When there are states around the world – the 60 or more secrecy jurisdictions that we know exist – offer facilities that are deliberately designed to undermine the effectiveness of the law enforcement agencies in these places then quite clearly they face an almost insurmountable issue in tackling the problems they face internally with the scarce resources that they have available to them. This means solving the problem of illicit financial flows cannot and never will be a matter for the developing counties of the world to tackle in isolation, and individually.

Third, this problem of secrecy jurisdictions is  not a problem the developing countries of the world created. It is one we in the developed world created, and from which they suffer, along with us. We created the limited liability corporation. It has been useful, and nothing will now make it go away. But we also allowed it to be debased, to became opaque to the point we know little or nothing about most of the world’s corporations - even to the extent of not knowing where some of them are incorporated, or if they even exist on registers anywhere. We allowed that to happen. We provided the space for that to happen. We do at present continue to tolerate that happening. This is a problem we must tackle or law enforcement in developing countries (and our own) will be continually undermined.

Fourth, we have allowed the secrecy space that the combination of multinational corporation group accounts and secrecy jurisdictions in combination provide and which between them enable the whole process of transfer mispricing to occur – to far too great a degree undetected.

Without a doubt there is a problem of law enforcement in some developing countries. It would be entirely wrong to deny it. But to say that this is their problem to solve alone and that we have no duty to reform the requirements of the international financial system to improve its efficiency as a mechanism for allocating resources, for enforcing property rights, for preventing bribery and corruption , for preventing crime and for preventing tax abuse is just wrong.

Richard Murphy Accountancy, Banking, Development, Secrecy jurisdictions, Task Force

FT.com / Companies / Financial Services - Lehman report casts auditors in poor light.

As the FT notes:

Claims about Ernst & Young’s part in the collapse of Lehman Brothers look set to open a wider debate on what has until now been one of the least dissected aspects of the financial crisis – the role played by auditors.

Anton Valukas’s report on the biggest bankruptcy in US history has sent shockwaves through the accounting fraternity in its heavy criticism of Lehman’s auditor E&Y, one of the Big Four firms.

It goes on to say:

The claims against E&Y, although exceptional, give grist to a growing lobby questioning the purpose of auditors in providing investors with a true picture of the financial health of a company.

This is where I part company with the report. What’s exceptional about E & Y’s performance. They:

- alloweed window dressing

- put fornm over substance

- ignore the true and fair over-ride

- box ticked to confirm compliance with an accounting framework they helped create and which is itself misleading

That’s what auditors do. There’s nothing exceptional about this. The only odd thing is no one has appreciated it - bar the likes of Prem Sikka, Dennis Howlett, Francine McKenna and me.

This is not chance. This has been the collective turning of a blind eye.

Of course that could carry on. But society will pay the price.

Richard Murphy Accountancy, Auditing, Big 4

How Do Business Owners Define Success? : CPA Trendlines.

US accountancy web site CPA Trendlines features a fascinating graph resulting from a survey by  the Enterprise Council on Small Business.  They asked business owners to define what satisfaction means to them. Business owners said maintaining a healthy work/life balance was the single biggest factor in their definition of success.

CPA says that:

surprisingly found that “satisfaction” was the primary way that they defined success, followed by “growth.”

The overall result was:

I don’t find this surprising at all. If people maximise it is their overall well-being that they seek to enhance. The myth of profit maximisation is just that: a myth. It’s one perpetuated by big business as an argument for unbridled growth. But no one in their right minds thinks it enhances well being.

Hat tip to Dennis Howlett.

Richard Murphy Accountancy, Economics

Under pressure: tax inspectors turn up the heat on the rich | Business | The Observer .

The Observer relaunches its business section by highlighting the abuse of the tax profession.

This is a battle HMRC has to win - and it will get ugly before they do. Expect more accountants to spend time at Her Majesty’s pleasure - and it won’t be garden parties we’re talking about.

Until the profession rediscovers ethics it deserves to be treated like a pariah - because that’s the way too many of its members behave.

Richard Murphy Accountancy, Ethics, Tax avoidance

General election 2010: which party is best for your finances? - Telegraph.

A chartered accountant (one who happens to be of my acquaintance) has written in the Telegraph:

In the end, all the parties badly need to demonstrate that they can balance the books and repair the country’s balance sheet, so the next five years are likely to be painful for taxpayers.

But he does not say why.

And I know that not all his clients will be balancing their books - many of them will borrow, for years at a time. And as he offers no justification for his claim it’s reasonable to presume it falls into category Paul Krugman recently described (edited):

These claims generally aren’t stated as opinions, as views held by some analysts but disputed by others. Instead, they’re reported as if they were facts, plain and simple.

Yet they aren’t facts. Many economists take a much calmer view of budget deficits than anything you’ll see on TV.

Why, then, all the hysteria? The answer is politics.

Poor politics at that as well.

I’d have hoped for better. But I didn’t get it.

Richard Murphy Accountancy, Economics

Only one Big Four firm produces UK annual report - Accountancy Age.

The Age asks:

Should the UK’s biggest firms set an example to their clients by producing a UK focused annual report?

The question arises after Deloitte said it will no longer produce a UK report. Instead the Big Four firm will focus on its audit transparency report and corporate social responsibility document, as well as flag up UK performance in Deloitte’s global annual report.

Dropping the UK annual report has become the thing to do among the biggest firms, as Deloitte joins Ernst & Young, which now only includes figures in a global annual report; and KPMG, which provides a European and global report.

This leaves PwC as the only Big Four firm to continue producing a UK-only annual report

Those driopping the report say this is becasue their legal structure has changed. So what? Has their accountability?

At a time when country-by-country reporting is on the agenda as never before the profession shows just where it stands - as far way from transparency as possible.

I seriously wonder when the Institute of Chartered Accountants in England and Wales and similar bodies will be renamed the Institute of Chartered Opacitors in England and Wales.

NB I claim opacitors as a new word!

Richard Murphy Accountancy, Big 4, Country-by-country

I noted the following, disappointing announcement by email:

The Treasury Committee is to take evidence from representatives of the audit and accounting profession on Tuesday 9 February at 10.45am. The session is an opportunity to follow-up recommendations made by the Committee in its report Banking Crisis: reforming corporate governance and pay in the City. The Committee will also be seeking information on any recent developments in audit and accounting, with a particular emphasis on regulation and the future role of auditors in banks and other financial institutions.

Witnesses:
Helen Brand, Chief Executive, ACCA,
Ian Paterson Brown, Convenor of Ethics Committee and Chair of working group on the provision on non-audit services, ICAS,
Robert Hodgkinson, Executive Director, Technical, ICAEW, and
Stephen Haddrill, Chief Executive, Financial Reporting Council

I have a simple question for the committee. Why, oh why ask the apologists? Why not ask the critics? Why isn’t Prem Sikka there? The people being asked above are the problem – especially when it comes to the failed model of bank bad debt accounting – and the committee is going to learn nothing unless the critics are there as well.

Richard Murphy Accountancy, Banking

Accountancy Age has published its Financial Power List for 2010. I featured on this list in 2006, 2008 and 2009. This year I don’t. But my friend and colleague Prof Prem Sikka does, which is just as good. They say:

44 Prem Sikka, professor of accounting, Essex Business School

Few in the accounting world don’t have a view on Prem Sikka. The outspoken professor of accounting is a voice of dissent within the profession, and routinely rages against perceived injustices. But his blog, on The Guardian’s website, reaches an audience seldom addressed by traditional accounting media – the general public.

Well done Prem!

Richard Murphy Accountancy

FT.com / Companies / Banks - Central bankers demand new rules.

The FT notes:

Top central bankers and regulators underlined their differences with accounting rule-makers on Monday over the way banks account for bad loans, highlighting the politicisation of the standard-setting process.

The central bank governors and heads of supervision of the world’s largest economies, who oversee the Basel Committee on Banking Supervision, said it was “essential” that accounting rule-makers and their supervisors develop a “truly robust” approach on banks’ provision for bad loans.

This was becasue:

The oversight body’s proposals would, crucially, lead to more smoothing-out of bank profits through the financial cycle than the IASB proposals would allow.

This, I stress is not a minor difference. This is the two bodies being fundamentally at odds with each other and with the IASB being absolutely in the wrong.

The IASB promotes the mark to market model. This is the absolute reverse of what accounting used to be when it came to bad debts. Accountants always used to anticipate losses on debts and make provision for them. This was prudent.

But come mark to market and securitised loans so long as there was a market for the security no provision for loss was allowed EVEN IF the underlying assets were obviously not performing: the market ruled value and prudence could not overtake. So there was no provisioning. Imprudence ruled. Losses could only be recognised when they had occurred with regard to the vast majority of bank debt.

So, of course, IFRS accounts allowed bank profit to sky rocket as loss provisions fell.

And then the world fell apart because bankers believed they could lend and never make a loss.

That is completely and utterly the fault of the International Accounting Standards Board.

No wonder Basel disagrees with them.

And Basel has to win this one. And all accountants should support Basel because prudent may be boring but it’s what good accountancy is about.

PS And you can’t blame the auditors - the Big 4 ensured the rules of auditing were changed so they no longer had to be prudent either - because they no longer had to say accounts were true and fair - they just had to say they were true and fair within IFRS - which meant that even if IFRS were nonsense they had no duty to apply what used to be called the ‘true and fair over-ride’ because that no longer existed.

Blame the IASB by all means. But let’s never forget that the IASB is the mere agent of PricewaterhouseCoopers, Deloitte, KPMG and Ernst & Young. And they are really to blame.

Richard Murphy Accountancy, Accounting, Auditing, Banking

Debtonation » Blog Archive » A new Icelandic ‘drop the debt’ campaign? .

My Green New Deal colleague, Ann Pettifor blogs regularly. She’s written in the last day or so about the debt crisis in Iceland. Ann has, of course, considerable credibility on this issue, having run Jubillee 2000 and having foretold the current world debt crisis.

She says:

About one quarter of Iceland’s voters - 56,000 people - recently signed a petition which urges President Olaf Ragnar Grimsson to ‘drop the debt’ owed to the British and Dutch governments.  This petition reflects the view of 70% of Icelanders, according to a poll taken in August.

This debt - which amounts to 12,000 Euros per Icelandic citizen - is the result of reckless lending by an unregulated, private bank - and reckless, unregulated borrowing by British and Dutch depositors that earned very high rates of interest on their risky deposits. For political reasons, these depositors were bailed out by the British and Dutch governments - at a cost of about 50 Euros per citizen.

A country with a population the size of the city of Leicester - 317,000 - is now asked to bear the full burden of losses incurred by a private bank, and by private citizens in two countries with a joint population of 76 million.

The Icelanders are right in their instincts that have given rise to their opposition: this debt is unpayable. More than that, it is not their fault. It was undoubtedly an Icelandic bank that failed. But the system in which it worked was not Icelandic. And the people of Iceland were not responsible for its failure. It is pointless to now ask them to pay.

There is, however, very good reason why they should expect the auditors of that bank to pay. They had responsibility for making sure it could pay. They had to assess that it was a going concern and failed to do so. For that they do have liability, and they should bear the cost.

But the people of Iceland should not.

It’s a simple choice: failed auditors or innocent people? Which would you choose?

Richard Murphy Accountancy, Auditing, Banking