Accountancy » Tax Research UK

Where 4 art thou?

Accountancy, Big 4, Secrecy jurisdictions, Tax Havens, Tax Justice Network 2 Responses »

Jan 302011

The Mail on Sunday seems to have got it in for tax havens – and those who operate there. And rightly so, of course.

Last week they highlighted the number of subsidiaries UK based multinational corporations have in such places, using methodology I have used in the past.

This week they’re back on the trail – highlighting the role of the Big 4 firms of accountants in these locations. As they note today:

The Big Four accountancy firms have come under attack for maintaining on average more than 20 offices each in offshore tax havens despite countries working together to crack down on tax avoidance.

The four firms – PricewaterhouseCoopers, KPMG, Deloitte and Ernst & Young – have 81 offices in offshore tax havens, according to new research by Financial Mail.

MP Chuka Ummuna, who earlier this month confronted Barclays chief executive Bob Diamond over the banks’ 300 offshore subsidiaries, said: ‘There’s a whole industry out there dedicated to helping people avoid tax that will increasingly come under the microscope.’

This work also seems to be based on methodology I have used before now – and I’ve got no complaint about that. Using a broader definition of tax havens / secrecy jurisdictions than The Mail has used I published a paper on this issue last summer, available here. I’d stress that it has been suggested I overstated the number of locations PWC have on Hong Kong: that aside I stand by the research.

And as I said in my paper, there is, I am sure, nothing illegal about what the Big 4 are doing. But as I also note:

[This paper shows] that the [Big 4] act as auditors and advisers to almost all multinational corporations. It is shown that they have prevalence in secrecy jurisdictions that cannot be explained by local commercial need. It is shown that those places in which they are present have much higher incomes per head of population than is to be found in those where they are not present. It is suggested that this is not the result of local characteristics of the places in which they are located but is the result of income being transferred into these locations for accounting purposes, a process which their presence would assist whether directly or indirectly.

And if there is reallocation of income to secrecy jurisdictions in which the Big 4 operate then it has to come from somewhere. That somewhere might be the UK, in which case, as the Mail is no doubt suggesting, it is at cost to the ordinary taxpayes of the UK. And if it is from developing countries it creates poverty – an argument many NGOs who work in developing countries have made. And that can cost lives when necessary resources are denied to the poorest people in the world.

I repeat, nothing illegal may be happening. After all, few tax havens / secrecy jurisdictions have transfer pricing legislation to make such practices illegal so it’s hardly surprising that what goes on in such places can meet legal expectations. That’s not the point though. There is a cost all the same. And one that is unacceptable to the UK, and the people of developing countries.

And the Mail is right to highlight that.

And in the circumstances the refusal of the Big 4 to answer the questions the Mail put to them is all the more telling. It’s time they were held to account for what they do. After all, that’s the very core of what they’re meant to be about, isn’t it?

KPMG plans to get them young

Accountancy, KPMG 7 Responses »

Jan 142011

The FT has reported that KPMG is planning to give up its graduate recruitment programme in the UK, and is instead planning to recruit before young people go to university. It is intending to take on 75 school leavers a year and send them on a four-year accountancy degree at Durham University, for this which KPMG will pay the costs, and a salary.

Three thoughts follow: KPMG are clearly worried about the need to catch young people young so that they can train them in their way of thinking before they can be corrupted by thoughts of ethics, tax justice or duty to society.

Second, doesn’t this deny 95% of the benefit of going to university, which in my experience was to have the opportunity to learn and question independently, even if I did end up with KPMG at the end of the process?

Third, shame on Durham for being so blatantly commercial that they will degrade their academic process into being a mere training scheme. I talk about regulatory capture quite often, but this is academic capture, and it probably amounts to much the same thing because in both cases the chance of objectivity disappears.

New professional guidance on tax avoidance

Accountancy, Tax avoidance, Tax compliance 18 Responses »

Jan 042011

The joint tax institutes of the UK have issued new professional guidance to their members today. It includes the following statements:

Tax avoidance is legal and is to be distinguished from evasion, which is illegal. All taxpayers have the right to arrange their affairs under the law to minimise their liability to tax.

Where a member is considering arrangements which may be viewed as artificial by the tax authorities, he should consider carefully the risks and merits. He should do this in the light of the client’s wider interests because of the risk that the arrangements may be challenged by the tax authorities.

The language is not that I would have used. But this does not seem – semantics aorta – that far removed from discussion of the difference between tax avoidance as I describe it ( seeking to pay the right amount of tax (but no more) in the right place at the right time where right means that the economic substance of the transactions undertaken coincides with the place and form in which they are reported for taxation purposes) in the first paragraph and tax avoidance as I describe it in the second paragraph.

And it is good that it is made clear that there is a choice implicit in the difference. That’s welcome.

Another accountant gets UK Uncut – so why don’t most?

Accountancy, Ethics, Tax justice 27 Responses »

Jan 032011

I’ve mentioned that Dennis Howlett is an accountant who has “got” UK Uncut.

Stuart Jones is another one who does so. As he has said on this blog today:

I went to see a “Topshop protest”.

I pay tax but as a Chartered Accountant I obviously save my clients paying too much tax. Everything I do is legal as is the case with the big name tax advisors. The difference is that I draw a line and advise my clients not to step beyond it for numerous reasons.

But I am sick and tired of seeing wealthy individuals and companies avoiding huge amounts of tax through artificial schemes which are ONLY available to them (because of their wealth).

Sitting on the fence has NEVER been an option for me.

Scrapping the tax avoidance “industry” would not affect any of my clients other than they may pay less tax because others are paying the right amount.

Keep up the good work Richard and UKuncut and if I (a 57 year old, politically right of centre, Chartered Accountant) am banned from a shopping centre for taking a photo of a Topshop then the protests must be worrying someone.

Stuart makes a really good point. Tax compliance is something wise accountants do – and yes, they still do help their clients plan their tax because there are legitimate choices to be made in the tax system and I’m not going to deny those to people. But that is fundamentally different from the artificial structures seen in tax avoidance. A wise accountant like Stuart can see the difference because it is plain to see to those in the know – and to those with eyes to see from beyond the profession.

The question is not one of legitimacy when it comes to this issue – we all know tax avoidance is as legitimate as apartheid was in South Africa once upon a time – it is one of ethics, inequality and the appropriateness of creating structures that do not reflect the economic reality of a transaction, which is why offshore is so often the focus of the debate since offshore is almost always tax avoidance activity and not tax compliant.

How is it Stuart can see that but the CBI can’t? And what’s wrong with a level playing field for big and small business in this regard – where all, of course, abide with the idea of tax compliance.

It would be great to hear the Big 4 or the CBI or the Institute of Chartered Accountants in England and Wales answering such questions. Because in the case of the CBI and the ICAEW they claim to represent the smaller businesses who are losing out as badly as ordinary people from this abuse. And how can they justify that?

A majority of the horrors we have faced are the fault of the accounting profession

Accountancy, Accounting, Auditing, Big 4 Comments Off

Dec 222010

In this interview, Stanford’s Professor Joseph A. Grundfest talks to Charlie Munger, vice-chairman of Berkshire Hathaway. The interview apparently dates from about December 2008) but it remains bang on the button.

As Munger says right at the start:

I would argue that a majority of the horrors wee face would not have happened if the accounting profession were organised properly.

But as he argues, they aren’t.

Hat tip: Ian Fraser

The Big 4 – time for the resumption of the exercise of judgement

Accountancy, Auditing 8 Responses »

Dec 212010

The FT has noted:

New York state prosecutors could file civil fraud charges against Ernst & Young for allegedly helping Lehman Brothers hide debt, according to a person familiar with the matter.

The office of Andrew Cuomo, the New York attorney general who will be sworn in as the state’s governor next month, could file a lawsuit as early as this week, this person said.

If a lawsuit is filed, it would be the first allegations involving Lehman since the bank filed for bankruptcy in 2008, and the first charges against an accounting firm in connection with the financial crisis.

No doubt the issue relate to repo deals undertaken in the UK to get round US accounting requirements and it is important to note E & Y said they had no comment but had required with accounting regulations. To some degree I’m going to accept that they might have done – having carefully noted the difference between complying with the spirit and letter of the regulation in question – which seems a vexed question in gernal on this site at present – and will move on to the more systemic issue of concern which also comes from an FT article, shared in the public interest:

Fresh details have emerged of secret talks between bank auditors and the government during the financial crisis, as regulators prepare changes to the auditor’s role to lessen the risk of similar chaos.

Letters disclosed to the House of Lords economic affairs committee by KPMG shed light on why auditors did not in general express doubts about the viability of UK banks and building societies during the crisis.

They show how the Big Four audit firms – Deloitte, Ernst & Young, KPMG and PwC – wrote to Alistair Darling, then chancellor, in November 2008 for advice as to whether they could describe UK banks as going concerns. Their letter was written two months after the collapse of Lehman Brothers and tried to gauge the extent to which the government would continue to prop up financial institutions.

The audit firms wrote that the post-Lehman turmoil had left them “having to second guess government actions” when assessing whether a bank could access sufficient funding for at least a year – the minimum for it to be viewed as a going concern.

They argued that a bank could fail if the auditor’s report on its annual financial statements contained an “emphasis of matter” paragraph drawing attention to uncertainty about its going concern status.

Controversially, the auditors added that the government could help ward off such disclosures by reassuring them that it would continue to recapitalise failing banks. The letter led to a meeting between the Big Four’s UK bosses and Lord Myners, then City minister, in mid-December 2008.

Following these talks, Lord Myners wrote to the four firms to reassure them that “the government remains committed to taking whatever action is necessary to maintain financial stability, protect depositors and protect the taxpayer”.

This is more serious. First, so significant was the matter that it seems to me that it would still have required specific reference in the accounts.

Second, it is apparent that limited liability was breached at this juncture.

As Dennis Howlett has said on this:

It’s a very long time since I undertook audit work in any depth but unless things have changed there’s a few things going on here that require explanation.

Have the Big Four attempted to abdicate their responsibilities to the shareholders of the banks by seeking to obtain an understanding of likely government action? The answer appears to be a qualified yes. In my day it was standard practice to take up third party confirmation where it appeared that third party support was needed in order to keep a business afloat. The qualification went something like: ‚ÄòOn the basis of our examination of the assets and liabilities, XYZ may not be a going concern. We have received assurances from [named third parties] who have provided financial undertakings to maintain the capital base of XYZ.’ There are plenty of variations on this broad theme but that’s the essence. We would have been be remiss in our responsibilities to clients if we had NOT sought assurance and crafted some sort of similar wording. In my day, banks and other third parties (like large suppliers) relied on the audit report in order to understand how companies might stay afloat. I’m sure the irony of this situation is not lost on those auditors in similar situations today.

The FT describes the exchanges between the Big 4 as ’secret talks.’ Why? The Big 4 are said to have been afraid that qualification might lead to collapse. If that’s true then surely they already knew or had grave concerns about their ability to sign off a clean report and the viability of the banks they were auditing. It doesn’t matter which way you slice and dice this argument you come up with the same answer: ass covering.

Did the Big 4 discuss the issue in terms of a veiled threat? In other words did they turn to government and say something like: ‚ÄòWe think the banks are in trouble to the extent we need assurance from YOU that government will bail them out. If not then [name your bank here] could go out of business.’ That’s not stated though commentators seem appalled that the Big 4 might operate this way. As they should. But then given the UK government’s proclivity for spending tax payers money to shore up pretty much any bank, it doesn’t take a genius to work out what government’s response was likely to be.

I buy all that.

And Dennis’ further comment:

What the hell is going on with our profession? How many more desperate measures will we see the Big 4 take before either litigation or firm government action is taken to sort out what is rapidly becoming an anachronism that feather beds a few to the detriment of the many.

I am sure the defence will be “we played by the rules”.

As with tax avoidance, no doubt.

But what is becoming increasingly clear is that a society where playing by the rules is the aim is not sustainable. Auditors and tax accountants are meant to exercise their professional judgement. And candidly I don’t think they are. And that is dragging down the whole basis of the corporate edifice with risk to the entire market system, at cost to us all.

Those with a neoliberal bent who argue otherwise threaten us all. The time for a revival of the exercise of sound judgement is now.

Hero of the day – Stuart Jones

Accountancy, Dennis Howlett, Tax justice, UK Uncut 1 Response »

Dec 202010

Dennis Howlett, a long term blogging friend of mine has a great blog on his site about another blogging friend and commentator here - Stuart Jones, senior partner 3CA, chartered accountants based in Kendal. As Dennis says:

He’s a really nice person who works hard to do the best he can for his clients. He gets rightfully annoyed at the antics of bureaucracies that harm, impede or otherwise behave badly towards the small business. He’s none too impressed by the way some people manipulate the tax system to their advantage. Last weekend he went out to support protesters at the Westmorland shopping centre. He ended up being banned from using the centre for the day.

Stuart followed up with a well timed blog post entitled: Why I think the protests against Topshop are justified. He says:

I have sent this letter to the Financial Times. Hopefully they will publish it.

Sir,

Richard Horton’s suggestion “that more UK tax would be payable if Sir Philip owned the companies himself, but he does not, and he cannot pay tax on something he has not received and to which he has no legal right” would be more believable if HM Revenue and Customs accepted his argument and stopped applying “income splitting” legislation to smaller companies.

Until they do criticism of Sir Philip Green’s tax “savings” is fully justified.

As Dennis concludes:

None of this will be news to chartered accountant Richard Murphy who has been campaigning on this broad topic for many years. What is different today is that the ‚Äòman in the street’ is finally seeing the direct impact of abusing the tax system on the ability of the nation to provide essential services. That’s where the rubber hits the road and where people like both Richard and Stuart have their part to play. They are the face of a progressive profession though you’d be hard put to know that when seeing some of the opposition ranged against their related but different stands on this topic.

Thanks to Dennis, but Stuart is a hero. It takes courage as an accountant to go out in the town where you work and protest about tax. Good for him! And it’s great to know there are accountants in the world who do think it’s right to protest.

I have no ethical problem with my actions as a chartered accountant

Accountancy, Ethics, Tax justice 9 Responses »

Dec 192010

Someone who reveals themselves to be both American and at the same time from the seriously far right of the political spectrum (from other comments made) mailed me this weekend asking:

As a chartered accountant do you feel that it is appropriate that you are calling for a social unrest program?

What a very odd question was my first response. After all, as far as I know I’m not promoting a program of social unrest. I am without a shadow of doubt opposed to the policies promoted by the government and I absolutely and always will uphold the right of any person to protest peacefully about such sentiments – this being a fundamental human right in according to the UN Charter. I will never condone violence but peaceful non-violent demonstration is as fundamental to the strength of our democracy as free elections.So the first response that this question was bizarre if posed by a democrat was justified.

My second reaction was – who is creating the social unrest here? I would have thought that a government deliberately putting more than a million people out of work was the party causing the social unrest. The idea that to raise objection to such destruction of well being is somehow wrong is again very strange indeed. To put it another way, I think the question was asked of the wrong person.

Then there’s the obvious implication that as a chartered accountant I must be an agent for oppression, or at the very least for maintaining the status quo on society. And yet again the response is that the question is bizarre. When so much that is so bad for our society has been created by the misdirected reforming zeal of chartered accountants – including the promotion of tax havens, the sale of tax avoidance, the promotion of regressive taxation that shifts the burden from capital to labour,PFI, the dismantling of regulation, the accounting for off balance sheet mechanisms and so much more besides – the idea that somehow it is wrong for an accountant to promote social change is odd. More strange still is the idea that an accountant standing up for openness, transparency, broader accountability, the end of illicit financial flows, the upholding of the rule of law, the proper amount of tax paid at the right time in the right place and ethical conduct by accountants so that they do not spend their time getting round the law is somehow the accountant who has to justify their actions is so very odd that the questioner really is showing their true colours in posing the issue to me.

I have no problem justifying what I do.

But I think a great many in my profession would face considerable difficulties if put on this spot and asked how they could justify that their actions were in the public interest. And yet it is that interest in which we are supposed to act.

Time to focus on the Big 4 – and their massive negligent in the banking crisis

Accountancy, Auditing, Big 4, Economics 2 Responses »

Nov 292010

The following is by Paul Cotteril and first appeared on Liberal Conspiracy and is reproduced here with permission:

The leftie blogosphere has been somewhat taken up recently with coverage and analysis of the student protests, and rightly so.

But in so doing this potentially huge story of rank corruption at the heart of the world’s banking industry risks being relegated to the obscure inside pages of the financial press, when it could do with being on the front pages of the papers that the occupying students hopefully get given by helpers from the outside.

It’s certainly educational, and may help with the formulation of demands‚Ä¶‚Ä¶

Auditors misled investors in the lead up to the crisis by supplying UK banks with a clean bill of health after being told taxpayers’ money would be used to bail them out, a House of Lords Committee has heard.

The Lords’ Economic Affairs Committee criticised auditors for signing off on banks’ accounts on the basis the UK Government would prop up the banks.

“Your duty is to report to investors the true state of the company. You were giving a statement that was deliberately timed to mislead the company and mislead markets and investors about the true state of those banks and that seems to be a very strange thing for an auditor to do,” said Lord Lipsey.