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‚Ķ‚Ķ

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.

Continue reading »

 Posted by Richard Murphy at 4:36 pm

Staggering admissions by the Big 4

 Accounting, Auditing, Big 4  20 Responses »
Nov 232010
 

The Big 4 are giving evidence to the House of Lords right now on auditing.

I missed the start but the admissions are amazing.

First Deloitte at least signed off bank audit reports saying they were going concerns in 2008 because they assumed the government would bail the banks out. They didn’t say so. But that was the reason for their unqualified opinions. I think their Lordships were surprised.

Second, PWC said Northern Rock had a clever business model everyone knew about.

Third, they have confirmed that IFRS did not allow a loss to be recognised as a provision – only when it had occurred. So as Tim Bush has said time and again – IFRS allowed profits to be recognised when not realised but did not allow losses to be recognised until realised – so building in massive overstatement of profits – and they all signed off on this basis.

Oh, and KPMG have said that they might have assumed a bail out because the government wanted them to do so and not mention it.

The arrogance, lack of flair, incompetence and sheer smugness is staggering.

If you wanted to know why the system is broken watch these four make fools of themselves.

 Posted by Richard Murphy at 7:16 pm

If banks undermine states they must account on a country-by-country basis

 Accountancy, Banking, Big 4, Country-by-country, IASB, Ireland  2 Responses »
Sep 302010
 

The FT reports:

The failure of Anglo Irish bank, the lender at the centre of the country’s financial crisis, would “bring down” Ireland, the country’s finance minister said, as he vowed the government would stand behind the institution as it winds down.

As Ireland’s Finance Minister said:

Any Anglo failure would bring down the sovereign. It is systemically important not because of any intrinsic merit in the bank. But because of its size relative to the national balance sheet. No country could contemplate the failure of such an institution.

Then note the FT reports:

Lloyd Blankfein, chief executive of Goldman Sachs, has issued a clear warning that the bank could shift its operations around the world if regulatory crackdown on the industry becomes too tough in certain jurisdictions.

The conflict between these positions is obvious. A bank can bring down a state. And banks don’t want to be regulated by the state.

There can only be one winner on this: it must be states.

And because it is very obvious that each and every person in every state is a stakeholder and supplier of capital to banks it is vital that banks be required to account on a country-by-country reporting basis. The argument that only the formal suppliers of capital through financial markets need have financial statements prepared for their benefit is so very obviously nonsense now that the claims by the International Accounting Standards Board, the Big 4, the largest multinational corporations that this is the case must be challenged, not least by all governments.

I look forward to the Irish government joining the demand for country-by-country reporting.

 Posted by Richard Murphy at 9:56 am

Big 4 – inadequate by any standard

 Accounting, Auditing, Big 4, Ethics  1 Response »
Sep 172010
 

As AccountingWEB notes:

The Financial Reporting Council has criticised the Big Four for lack of ‚Äòprofessional scepticism’ and failure to meet ethical standards in its latest audit inspection report.

Despite the quality of firms’ policies and procedures, the number of audits assessed by the  Audit Inspection Unit (AIU) – which forms part of the Financial Reporting Council – as requiring ‚Äòsignificant improvements’ remains too high, said the report.

The key findings of the inspections were:

  • The firms have policies and procedures in place to support audit quality that are generally appropriate to their size and the nature of their client base.
  • Despite the quality of the firms’ policies and procedures, the number of audits assessed by the AIU as requiring significant improvement remains too high.
  • The findings suggest that the firms are not always applying:
    • Their procedures consistently on all aspects of individual audits;
    • Sufficient professional scepticism in relation to key audit judgments.
  • Firms need to embrace more fully the principles underlying the Ethical Standards and, in particular, accept that non-audit services should not be provided to audit clients where appropriate safeguards do not exist.

When these firms can do their own jobs properly; when these firms understand ethics; when these firms can use sufficient professional scepticism (shall we cal it competence?); when these firms can show they can do much, much more than write a procedures manual then they might have something to say that the rest of us might listen to.

But right now these firms seem unable to live up to their own standards, let alone those expected of them by the rest of us.

It’s a sorry tale.

Repeated in secrecy jurisdictions around the world – where the one uniting feature is the presence of these firms.

 Posted by Richard Murphy at 12:03 pm

Who did the Big 4 fund before the general election?

 Accounting, Big 4, ConDems, Ethics  23 Responses »
Aug 192010
 

The issue of who the Big 4 did fund before the election seems to have been of some (actually, considerable) interest since the figures for the Tories were posted here.

I’m grateful to commentator Infrequent Observer for updating the data to cover all the major political parties. As he or she put it:

Just to bring some balance to the story, below is a table detailing donations received by the Labour and Lib-Dem Partys from the same audit firms for the same period. It seems all parties benefit from ‚Äòpro bono’ work to some extent. I am not saying I agree with it, just pointing out it isn’t just the Tories that accepted donations. I guess consideration also needs to be given to whether the support was offered by the audit firms (demonstrates leanings by firm toward one party over the other) or asked for by the parties (demonstrates more resources required by one party over the other). The answer to this may inform why the numbers are as they are.

 

Firm Labour Conservative Lib Dem

Deloitte

£13,500.00

£323,501.75

£0.00

Ernst & Young

£0.00

£63,989.08

£0.00

Grant Thornton

£0.00

£15,000.00

£0.00

KPMG

£284,766.00

£435,973.00

£242,587.24

PWC

£184,193.00

£533,063.68

£78,710.00

Total

£468,459.00

£1,371,527.51

£321,297.24

 

I note what Infrequent Observer says.

But let me also be candid, I note considerable bias.

And that justifies my belief that:

a) Nothing these firms says is objective;

b) These firms have sought to use their influence to capture public revenue streams for their private benefit.

Don’t get me wrong: I’m not for a minute suggesting impropriety. But that was never needed. I’m simply saying their lobbying to a particular party achieved results from which they can very obviously gain, and that must have been a foreseeable, and anticipated outcome.

And I can say I find that distasteful. Because I do.

 Posted by Richard Murphy at 9:01 am

Country-by-country reporting would help the IRS tackle the tax gap

 Big 4, Secrecy jurisdictions, Tax avoidance, Transfer Pricing  1 Response »
Aug 162010
 

I have suggested before, and I will suggest again, that transfer pricing is  contributor to the tax gap.

Oddly (!) the tax profession – and especially those parts with links to secrecy jurisdictions – deny this.

Many are not convinced by such arguments. Take this testimony given by the IRS to Congress in July:

               Testimony of Stephen E. Shay
               Deputy Assistant Secretary (International Tax Affairs)
               U.S. Department of the Treasury   
               Before the U.S. House Committee on Ways and Means July 22, 2010

Chairman Levin, Ranking Member Camp and members of the Committee, thank you for the opportunity to testify on the important topic of transfer pricing. I will focus my testimony today on Treasury’s analysis of the available data relating to the issue of whether profits are being shifted abroad out of the United States for tax purposes through the mechanism of related party transactions or, as the mechanism is more commonly known in the tax policy community, through transfer pricing.

We conclude, based on our analysis of available data, that there is evidence of substantial income shifting through transfer pricing.

My emphasis added.

And as they note – there’s a very odd correlation between tax rate and profits in MNCs. As the tax rate of a jurisdiction goes up reported profit in relation to sales goes down – and the IRS do not believe that is because of costs, very clearly.

The answer, of course, is clear – as the evidence on evidence also showed. Country-by-country reporting would help enormously in tackling this issue.

 Posted by Richard Murphy at 10:33 am

Where are the Big 4?

 Big 4, Secrecy jurisdictions  2 Responses »
Aug 092010
 

I mentioned my new Briefing on the Big 4 and secrecy jurisdictions on Friday.

Perhaps the most important data to highlight is in just which secrecy jurisdictions the Big 4 operate. The following table was researched in the summer of 2009 and is based on a variety of sources from the Big 4 including their annual reports and various web sites they run (Deloitte India was very useful, for example!), necessitated by the fact that by no means all the sources agree (an interesting point in its own right):

 Posted by Richard Murphy at 9:37 am

Where 4 art thou?

 Big 4, Secrecy jurisdictions  3 Responses »
Aug 062010
 

I was asked to undertake some research on secrecy jurisdictions by the World Bank last year, and presented some of my findings at a conference in Washington last September. The paper basically concerned the offshore secrecy space – the nature of which I note below.

The World Bank promised to publish the paper in a book – but it looks that may not happen this year now (amazingly) and if it does a part of the paper – on the role of the Big 4 in this process – will perforce have to be omitted due to pressure on space. Rather than let a good paper go to waste I have now turned the relevant part that has been excised from the final work into a separate paper – called Wherefore Art Thou – which I have now published as a Tax Research Briefing.

I’m going to feature some of the papers findings over the next few days, but by way of introduction this is the summary of the paper:

This paper considers the role of the Big 4 firms of accountants – PricewaterhouseCoopers (PWC), Deloitte, Ernst & Young (E&Y) and KPMG – in the creation of the offshore secrecy space.

Part 1 of the paper shows that secrecy jurisdictions deliberately create opacity with regard to financial data and that multinational corporations appear to exploit this opportunity to create opacity in their financial reporting. As a consequence it is clear that there are far too many companies incorporated in these places than local need or normal commercial opportunities could possibly justify. The conclusion drawn is that these places do, as the definition of them used in this paper (page 3) suggests likely, exist to provide services to persons who are not resident within them and who do not actually undertake trade there, but who wish to avail themselves of the veil of secrecy these locations facilitate for those making use of their services.

In the second part of the paper the concept of the ‚Äòsecrecy space’ which combines the opacity of secrecy jurisdictions with the opacity found inside group consolidated accounts of multinational corporations is developed. It is suggesting that this secrecy space might facilitate transfer mispricing.

In the third part of the paper the role of the Big 4 firms of accountants in this process is questioned. It is shown that they 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.

So what might be concluded from this? Causal links cannot, of course, be proven by mere association. Nothing noted here alters that fact. However, the associations noted in this paper are so abundantly clear it is suggested that they are not mere chance. Nor does it matter which caused what first: over many years the association between opacity, secrecy jurisdictions, transfer mispricing and other commercial tax abuse by multinational corporations and the existence of the Big 4 as auditors of those corporations and suppliers of services to them in secrecy jurisdictions in which those Big 4 firms are also major economic participants and without whose presence many of those secrecy jurisdiction could not supply such services, have become a tangled and connect web which imposes on the world those costs noted in the introduction to this paper.

And as that introduction notes, until such time as this situation changes we have the right to ask the reasonable question – wherefore art thou? (and any reasonable variation on the theme) until such time as we secure the transparency society needs so ensure that effective markets can operate, economic resources are allocated efficiently and tax compliance exists – where tax compliance is defined as 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.

 Posted by Richard Murphy at 9:40 am

Auditors failed when signing off bank accounts

 Auditing, Big 4  1 Response »
Jun 302010
 

The Guardian reports:

The role of accountants in the banking crisis was thrust into the open yesterday when the Financial Services Authority said that the profession had not been sceptical enough about the financial firms it audited in the run up to the banking crisis.

The City regulator, setting out a case to have the powers to publicly censure and fine auditors, also noted that some firms appeared to be "systemically aggressive" in some of their accounting policies.

Paul Sharma, FSA director of prudential policy, said: "Our experience has indicated that, at times, auditors have focused too much on gathering and accepting evidence to support firms’ assertions, rather than exercising sufficient professional scepticism in their approach. This falls far short of what the FSA – and society at large – expects from auditors."

The FSA said its work since the banking crisis had led it to question whether auditors had been "sufficiently sceptical" when challenging the models used by management to measure their bad debts and said it was "concerned that the dispersion in valuations – both within and between firms – for similar items is higher than might be expected".

It said there had been an "inadequate level of challenge to firms’ management" from auditors about some of the crucial assumptions they make in deciding whether to take a provision for a loan that is not being repaid.

The regulator is particularly scathing about the way auditors tackled client assets – where, since Lehman’s collapse, firms must show they keep client’s money safe – saying it had found "material weakness" in some reports filed by auditors.

What can I add? Except the likes of Prem Sikka, Dennis Howlett, Francine McKenna and I can all say “we told you so”.

And “when will they listen?”

 Posted by Richard Murphy at 10:14 am
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