Big 4 » Tax Research UK

The cosiness of the tax avoidance industry

Dec 212011

This is my friend Prof Prem Sikka in the Guardian yesterday:

[The Parliamentary Accounts Committee] laments HMRC’s cosy relationship with large companies, but is silent on the cosiness with the tax avoidance industry. It notes that HMRC officials attended numerous lunches, dinners and receptions organised by PricewaterhouseCoopers (PwC), KPMG, Deloitte and Ernst & Young. The lavish hospitality is organised to promote private interests rather than enhance HMRC accountability.

Many former ministers act as advisers to big accounting firms. For example, Labour grandee Lord Peter Mandelson has been an adviser to Ernst & Young. Former ministers Lord Digby Jones and Lord Norman Warner of Brockley have been advisers to Deloitte. Former Labour home secretary Jacqui Smith is a consultant for KPMG. Former Conservative minister Sir Malcolm Rifkind has been an adviser to PwC. Do such political links skew the relationship between government departments and the private sector?

The links between the big accountancy firms and the Treasury attract no comments from the committee. For example, former PwC staffer Mark Hoban is the current financial secretary to the Treasury. Sir Nicholas Montagu, one-time chief of the Inland Revenue, joined PricewaterhouseCoopers in 2004 before moving on to other lucrative commercial appointments. PwC partner Richard Abadie has been the head of private finance initiative policy at the Treasury. In June 2009, former PwC partner Amyas Morse was appointed UK comptroller and auditor general and became responsible for directing the National Audit Office. Former PwC tax partner John Whiting is the director of the newly established Office of Tax Simplification, advising the government on simplification of tax laws. Chris Tailby, one-time tax partner at PricewaterhouseCoopers became head (until 2009) of anti-avoidance at HMRC. In July 2010, partners from KPMG, Ernst & Young, Grant Thornton and BDO became members of the government appointed Tax Professionals Forum and help shape the UK tax laws.

And he has only scratched the tip of the iceberg.

The revolving door is a massive problem, not least as many of these firms have had prosecutions or professional judgements against them for tax abuse in the last decade whilst at the same time they operate in all the major tax havens where they work day in and day out to undermine our democracy and that of other states by seeking to actively undermine our tax systems, laws and regulations, all of which, in my opinion, should debar them from consulting for the government.

Will the Big 4 fight back?

Auditing, Big 4 1 Response »

Oct 042011

I liked an article by Ian Fraser in the Sunday Herald this week. In it he said:

The “Big Four” accountancy firms, whose complacency and dereliction of duty were major contributors to the banking crisis that tipped the UK into recession, could be getting their comeuppance at the hands of the European Union.

The story of Deloitte, Ernst & Young, KPMG and PWC and their obliviousness to malfeasance and fraud in the banking sector in the bubble years has not been sufficiently told. They didn’t raise any red flags about the massive risks that were building up in the financial system. And they gave a clean bill of health to numerous diseased brands including HBOS and Royal Bank of Scotland weeks before the undertakers arrived.

And as he notes:

Proposals from the EU’s internal market commissioner Michel Barnier would [seek to] put a stop to all this. He wants to force accountancy firms to choose between being consultants or auditors. As already happens in France, audit firms would have to work jointly with other audit firms and face time limits on how long they could act as auditors to the same company.

I’ve already commented on this idea, warmly welcoming it. Unsurprisingly Ian Fraser thinks the Big 4 might not share that view:

The Big Four are aghast at these proposals. Their lobbying machine is already getting into gear and they’re warning of “unintended consequences”.

He thinks they might win support for their view too:

In the UK, the Big Four may gain some traction. The firms enjoy an entrenched position thanks to the revolving door between the Big Four and the civil service via secondments and government contracts.

And as he concludes:

The outcome of Barnier’s plan remains uncertain. However policymakers need to set aside their cronyism and ask themselves a simple question. Can the UK really afford to maintain an accountancy profession which, by its own actions, has proved itself to be a danger to capitalism itself? Barnier’s proposals would not fully address the problem, but they are a sensible start.

I wholeheartedly agree.

The reform of finance does not begin and end with the banks.

With the greatest of respect to the police – you really need to properly identify the threats to the state

Big 4, Conservatives, Ethics, Politics, Tax Havens, Uncategorized 14 Responses »

Jul 312011

As Sunny Hundal notes on Liberal Conspiracy:

A weekly briefing by the City of Westminster’s ‘Counter Terrorist [sic] Focus Desk’ (see here– PDF file) calls for al anarchist activities and events to be reported to the police.

Next to an anarchist symbol, the briefing states:

Anarchism is a political philosophy which considers the state undesirable, unnecessary, and harmful, and instead promotes a stateless society, or anarchy. Any information relating to anarchists should be reported to your local Police.

As Sunny then notes on Twitter:

I’ll only accept this if they arrest Tory libertarians first. They believe about the same and present a far bigger danger to society.

I’m a long, long way from being an anarchist and have no sympathy with the underlying logic of their philosophy. Given that I’m at the computer today working on my new book, ‘The Courageous State’, I think that’s pretty obvious. But Sunny is right: those left-wing anarchists who the police are focusing upon are not a major threat to society. Again, let’s be clear – I do not condone any violence, and some anarchists have undertaken it in the last year, but a shop window or two, whilst reprehensible and worthy of punishment is behaviour about equivalent to that of many yobs on a Saturday night, and cannot be considered a serious threat to the state.

On the other hand, on the Tory right there are many organisations that are actively going out of their way to suggest the state is a bad thing. As I noted recently, I spoke at a supposed All Party Parliamentary Group meeting in the House of Commons last month sponsored by three organisations that seem to have outright opposition to the state at the core of their purpose. They are the Institute of Economic Affairs, the Adam Smith Institute and the Cobden Society. At that meeting the audience, drawn very largely from those organisations and certainly not representing All Parties or even Parliament (which is unsurprising, this Group – which is new – appears to be yet another right wing Tory front) lapped up the comments by one speaker – Mark Pennington – who argued that the state does not have the legitimacy to create law and only the market does. Now that I call a serious challenge to the state – but it was readily apparent that it was popular with some Tories present, including sitting MPs.

And if we are talking about threats to democracy I have long argued that the four largest organisations that pose a serious, coordinated, threat to democracy are the Big 4 firms of accountants. They are, after all, largely responsible for legitimising the activities of tax havens or secrecy jurisdictions as I prefer to call them*, and use them in coordinated fashion (detailed here) to ensure that their clients pay less tax than the democratically elected governments of major states think is due to them as a result of their activities. Is there any better way to undermine democracy than to deny a government the tax revenue stream it requires to fulfil the mandate it has been given by its electorate? I can’t think of one that’s likely to be more subtly effective.

We do face threats to democracy, our way of government and our way of life right now: very serious threats indeed. But it seems the police aren’t able to identify them. And perhaps that is one of the most worrying things of all.

* Secrecy jurisdictions are places that intentionally create regulation for the primary benefit and use of those not resident in their geographical domain. That regulation is designed to undermine the legislation or regulation of another jurisdiction. To facilitate its use secrecy jurisdictions also create a deliberate, legally backed veil of secrecy that ensures that those from outside the jurisdiction making use of its regulation cannot be identified to be doing so.

Time to look at the systemic issues: Hackgate is not just about one company; it’s about the need for enhanced corporate accountability

Accounting, Auditing, Big 4, IASB 5 Responses »

Jul 182011

Hackgate (as it now seems to be called on Twitter at least) is not, I venture to suggest just about hacking, Rupert Murdoch and his acolytes, one rotten newspaper or even the media as a whole. It is about a systemic failure of responsibility and accountability, assisted by massive opacity.

That opacity has in turn led to three things. The first is massive wealth imbalances which are only dimly but none the less accurately perceived. The second is a real threat to democracy that has been almost completely hidden from view. Those two in turn have led to alienation that is now leading to a breakdown in trust. That, of course, then threaten society itself.

There is enormous opacity about business activity in the UK, and throughout the world. Company accounts have become longer but less meaningful. New accounting rules introduced by the International Accounting Standards Board have reduced the status of those accounts to being data solely designed to assist those speculating on financial markets. All responsibility of the directors for the stewardship of corporate assets under their control or any hint of responsibility on their part to long-term investors has been eliminated from financial reporting by this body. The result is that, as was witnessed in much of the discussion headed by Luke Johnson, chair of the Royal Society of Arts on BBC 24 last night, the capacity of the business community to assess the impact of this issue is reduced to discussion of its consequence for the share price. Nothing else, apparently matters.

And yet, we know it does. We know that what corporations do is fundamentally important. We know that they can hide the truth of what they do. They can do this within their own accounts, and most especially they can do it in the accounts of their subsidiaries, and particularly those that are located in tax havens. They can hide the existence of those tax haven subsidiaries from view.

An addition, the way in which company accounts are presented to members, on a purely consolidated basis so that internal transactions are not seen means that those payments made within organisations to hide the location from which corruption is managed can never be identified. But then, not can most of their use of tax havens for any reason be identified, any more than their use of such locations to ensure they minimise their contribution to society in a way designed to undermine the democratic mandate of elected governments be assessed.

This is of course suits the cheat, the crook, the monopolist and the person simply seeking to hide from regulatory purview; they’re all assisted by this opacity, deliberately created over many years, and advanced considerably over the last few by the complicity of the Big 4 firms of accountants who have set out to create an accounting framework that lets multinational corporations undertake their trades behind a veil that outs them almost beyond scrutiny.

The consequences are clear. We have companies like News Corporation that have, it is now clear, committed illegal acts (because some people have already been found guilty of them) where directors can apparently claim that they knew nothing of what was going on. Well of course that is, theoretically, possible in the situation I describe. Because such multinational corporations can heap subsidiary company on subsidiary company within the organisation and push responsibility for payments down into lower entities within the group which the higher directors can then claim to only have interest in as shareholders those high-level directors can then use this structure to seek to avoid responsibility for the activities of the companies which they control. I have little doubt that at some point in time this defence will be rolled out in the case of News International.

This, however, is not good enough. Business is an amazing thing: it has delivered, and can still deliver, enormous prosperity within the UK and around the world. Let’s not forget that for a minute. But it also has the capacity to abuse. It can abuse employees; it can abuse shareholders and it can abuse the public at large. Despite this the only account that we have of what it does is provided by the financial statements that each multinational corporation is obliged to supply to its members each year, The content of those accounts is regulated almost entirely by the International Accounting Standards Board which has very recently sought to narrow its remit and the scope of its responsibility. As I noted on Forbes recently, the existing constitution that governs the International Accounting Standards Board says its purpose is:

(a) to develop, in the public interest, a single set of high quality,understandable, enforceable and globally accepted financial reporting standards based upon clearly articulated principles.These standards should require high quality, transparent and comparable information in financial statements and other financial reporting to help investors, other participants in the world’s capital markets and other users of financial information make economic decisions.

(b) to promote the use and rigorous application of those standards.

(c) in fulfilling the objectives associated with (a) and (b), to take account of, as appropriate, the needs of a range of sizes and types of entities in diverse economic settings.

Note that right at the outset the public interest comes first ( at least on paper, if not in practice). And note too that whilst participants in the world capital markets are important (and they are) it is recognised that the interests of other users of financial information are just as important, even if again practice has not followed principle. Finally, amongst the many points that could be noted, it is clear that this body thought it had obligation to all types of economic entity, in all types of market, and economies.

However, at this moment the International Financial Reporting Standard Foundation that governs the International Accounting Standards Board is revising its constitution. I have no doubt at all that one reason it is doing so is because of the pressure brought to bear on it by the in civil society campaigning for country-by-country reporting which would expose the tx haven activity of multinational corporations, which is being massively resisted by the accounting profession. This is what it says in its proposed revised constitution:

In carrying out the IFRS Foundation’s mission as the standard-setting body, the IASB should develop financial reporting standards that provide a faithful presentation of an entity’s financial position and performance. Those standards should serve investors and other market participants in their economic and resource allocation decisions. The confidence of all users of financial statements in the transparency and integrity of financial reporting is critically important to the effective functioning of capital markets, efficient capital allocation, global financial stability and sound economic growth.

All mention of the public interest has gone. Now the sole purpose of financial reporting is to serve the needs of financial markets. There is nothing else.

This is extraordinary: at a time when the need for greater transparency and accountability with in multinational corporations has never been higher to restore public confidence, to support democracy, and to ensure that people are not abused the accounting profession is closing ranks to make sure that the information available on the trading and other activities of the world’s largest companies is more hidden from view than ever before.

Hackgate must have consequences. One of them is that questions must be asked about the right of the self appointed, private sector, tax haven-based organisation called the International Accounting Standards Board to create rules for accounting for the world’s largest companies when there is a complete conflict-of-interest within it because the Big 4 firms of accountants sponsor it, their clients help promote it, and the needs of society at large and the democratic principle that companies are accountable to the states in which they are incorporated, and to the people of the world at large are ignored by it.

We cannot hold the world’s corporations to account when they control the rules of accounting. The time to reclaim those rules for parliaments has come, and the process of oversight of that rulemaking has now to be transparent and accountable itself, with the rights of large corporations being respected, but by no means being dominant within the process.

Will our legislators have the confidence to do this? Will they grab this opportunity? If they don’t, they will leave us for ever guessing about what large corporations are doing, and will give those multinational corporations the opportunity to hide for good their activities, licit or otherwise, from public view. We cannot afford that. Democracies cannot survive that. Our society is threatened by the current opacity we suffer. The time for reform is now.

What the Mail says: Do these people have no sense of loyalty?

Big 4, Country-by-country, Economics, Ethics, IASB 1 Response »

Apr 042011

I’m not a great fan of the Daily Mail and its Sunday counterpart: their politics are rarely the same as mine. But there’s a not a shadow of a doubt they are a good bellwether of national sentiment, whether that’s good or bad. So it’s interesting that the Mail on Sunday said yesterday:

With only days before the Independent Commission on Banking delivers its interim proposals, the lobbying by several of our major banks is becoming furious. Barclays, HSBC and Standard Chartered, while officially denying plans to quit London, now say that on behalf of shareholders they would have to consider changing their domicile if the ICB’s proposals are too draconian.

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For a sector that claims to want to draw a line under the disastrous few years when taxpayers ploughed in countless billions in bailout money, toxic loan insurance, quantitative easing and other guarantees, such high – handed threats simply add to the sense of haughty disregard of public opinion – a disdain eloquently demonstrated by the billions that were shelled out in the recent bonus round, by the banks’ refusal to deal fairly with small businesses and by their continued lamentable standard of customer service.

Do these people have no sense of obligation to this country and its taxpayers?

No, they don’t.

That’s the simple answer.

But of course they should.

Country-by-country reporting is essential precisely because people like Mail readers think that companies do owe a duty of care to each and every state in which they operate. Paying tax is the ultimate measure of corporate social responsibility. The Mail gets that.

So why doesn’t George Osborne – who still opposes country-by-country reporting for banks?

And why doesn’t the International Accounting Standards Board?

Or any Big 4 firm of accountants?

Could it be that 1% thing?

Who is to blame for Ireland’s crisis? Easy: they need to sue KPMG, PWC and E&Y

Auditing, Big 4, Ireland 6 Responses »

Apr 012011

Ireland’s banks are bust.

They were foreseeably bust a long time ago. The failure is spectacular by any standards.

The accounts of Irish banks had to be wrong when signed off at the height of the boom. They were imprudent.

Who signed them off?

AIB – KPMG

Bank of Ireland – PWC

Anglo Irish Bank – Ernst & Young

Irish Nationwide – KPMG

Irish Life & Permanent – KPMG

Why are no writs being issued?

Let’s be clear – these banks failed to anticipate losses using reckless mark to market procedures that ensured they failed to comply with requirements that capital was preserved to protect creditors – the fundamental duty of all companies (over and above any duty to make a profit). The auditors were complicit in that in falling to identify the conflict between accounting requirements and company law – which in this case is the same for all practical purposes in Ireland as it is in the UK – where the same neglect took place, as the UK’s House of Lords made clear this week.

So sue, I say.

What have the Irish got to lose?

Most accountants who’re making comment are to blame for the mess we’re in

Accountancy, Barclays, Big 4, Ethics 11 Responses »

Feb 202011

Nick Cohen wrote in the Observer today:

The banks are as great a threat to our national security as a foreign enemy. We collect intelligence on hostile powers. Why should we not collect it on the hostile City?

He’s right in his analysis: the banks, and let’s be honest about this, some other parts of the financial services industry and big business, are a massive threat to our well being. What they promote is detrimental to the well-being of the vast majority of people in this country.

And yet it’s assumed they’re the innocent party. Clear evidence of this came yesterday. As I’ve noted, I gave several interviews for the BBC on Barclays’ tax. All I am asking Barclays to do is to pay their tax in accordance with the letter and spirit of UK law – something they have signed up to do but which i doubt they have done in the past. And yet the BBC were tortured in their attempts to link me to UK Uncut, or not (as is the case – as I made clear – I have sympathy but am not a member – however that might be defined). As was explained to me that’s because they had to make clear to viewers “I have opinions, but of course most accountants who come on are just commentators”.

No they’re not! Most accountants who go on air come from the big firms – and they’re the architects of the tax abuse we are witnessing and the failure to account of which we are seeking the consequences. They’re not innocent, unbiased parties. They’re profoundly political, utterly conflicted by self interest and wholly vested in maintaining the status quo.

But because I simply ask that people comply with the law as parliament intended it my position has to be explained.

Cohen is right – these people have even captured the BBC, and it’s time we reclaimed the state for the benefit of the people of this country – because right now it is being openly abused by those who really are its enemies.

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?

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.