FT.com / Companies / Banks - Deloitte chief reignites accounting debate.

The debate on how to account for banking losses goes to the core of International Accounting Standards project.

Now Deloitte and PWC cannot agree on the issue,a s the FT notes:

Jim Quigley, global head of “Big Four” accounting firm Deloitte Touche Tohmatsu has proposed that banks account for losses in two radically different ways, to meet the opposing demands of politicians and accountants.

He has told the Financial Times that he is an “advocate” of banks making loan loss provisions for “incurred losses” separately from “expected losses” – and reporting them in two different lines in their accounts.

However, PWC says this proposal would:

“muddy the waters”.

Politicians and regulators have blamed the current system of “incurred losses” – whereby companies may make provision for loan losses only as they occur – for exacerbating the crisis, by encouraging a cyclical approach to risk management.

But that view is questioned by many accountants and bankers who argue that “incurred losses” give investors clarity. Accountants and bankers are also are sceptical about the “expected loss” model, as they fear it raises the risk of “cookie jar” accounting, whereby executives put funds aside during years of bumper profits only to release them later to cover up bad performance.

Let’s be clear about this: until 2005 everything PWC are arguing for would have been unacceptable in the UK. We did expected loss accounting under UK rukles. It is only the International Accounting Standard Board that over-ruled this.

Three years later most banks fell over.

And the thing PWC is arguing against is anti-cyclical provisioning to ensure capital retention. To put it anothjer way, PWC wants pro-cyclical accounting that encoruages recklessness.

PWC’s recklessness seems to know no bounds. The lack of honesty in their argument is also stunning: to suggest that the prudence that under-pinned accountancy for more than a century is “cookie jar” accounting is an appalling mis-statement of reality. That prudence served us well and is exactly what we need now.

PWC needs a rude awakening.

Richard Murphy Accounting, Banking, Deloittes, PWC

I debated bankers bonuses with Mike Warburton of Grant Thornton yesterday on Radio 2. As Howard reed – a co-author of mine on the recent Compass tax report noted:

I doubt there will be many sympathisers with Mike Warburton’s position outside the banking sector itself. He was effectively arguing that the UK should tax bankers as lightly as possible when times are good and then give them as much money as possible to bail them out when times are bad. One doesn’t need to be an economic genius to work out that this creates an incentive for bankers to gamble as recklessly as possible in the knowledge that the taxpayer will always bail them out. It’s a crazy approach - and I think the UK public understands that at a fundamental level.

I am sure Howard is right. But this morning we have my old friend Bill Dodwell of Deloittes telling the Guardian:

We’ve had calls from bankers asking about … what action they might take under the Human Rights Act. There’s never been a precedent [for a tax targeted on one group].

I think government lawyers will be working incredibly hard as to whether this [tax] is feasible at all

You can be sure that Bill will be doing his best to make sure it is not. So will Jon Terry at PWC, who said:

They will find ways around it

Since the report continues by noting:

Terry at PwC said the definition of "bonus" and "banker" would be crucial

I think we can safely assume that Terry actually means “we will find ways round it”.

This is the madness of the big firms of accountants. I use the word mad advisedly. If mad means “being out of touch with reality”, and I think it does, then I can genuinely say these comments represent the madness of these firms.

If they continue this way accountants are next for public opprobrium. And quite rightly so. Advertising intent to circumvent the law is, in my opinion, profoundly unethical behaviour if that is, indeed, what they are doing.

Richard Murphy Accounting, Deloittes, Ethics, PWC, Tax avoidance

FT.com / UK - Ministers face call to act on tax havens.

FT comment on the Deloittes report on tax avoidance:

The report on corporate tax avoidance - prepared by Deloitte, the accounting firm - calculated its £2bn maximum figure by analysing the financial results for last year for 50 of Britain’s biggest businesses.

But Richard Murphy, author of a report last year which put avoidance at more than £10bn, said it was “ludicrous” for Deloitte to base its sample on an “aberrant year” of “enormous shocks to the financial system”.

That about sums it up.

Richard Murphy Deloittes, Tax Havens, Tax avoidance

The Foot report undermines any credibility it has by using an analysis by international tax avoiders Deloitte to support its work.

Deloitte operates in just about every major tax haven in the world. How could it provide an objective opinion on their role and function? It is blindingly obvious that they have vested interest in ensuring they continue in operation. Worse, Deloitte actively promote that operation.

I note much of my work, and that of those I work with is referred to in the Deloitte report. I also note that, as with the earlier Oxford report, the work is partial, ill informed and was not subject to any discussion by them with me or nay of the other authors involved. As such it is glaringly obviously deficient: assuming a blog is a referenced piece of work is odd, to say the least.

There is, however, one very perverse dimension to the report. Deloitte say:

We have reviewed attempts to quantify the UK “tax gap” relating to CT. There have been a number of studies in this area, but few deal with the loss of tax to the UK specifically, and none of those we have identified directly addresses the contribution of the CDs and OTs to the UK corporate “tax gap”. For our assessment, we have built on the approach adopted in the TUC’s 2008 pamphlet “The Missing Billions: the UK tax gap”

Let me be honest, my brief review suggests that they have got this analysis wrong – and I will explore this further, soon. But let me reflect just for a moment on the use by Deloitte of my methodology. When The Missing Billions was published Bill Dodwell, head of tax at Deloitte described it as ‘just rubbish’. Now Deloitte have used it as the basis for their own methodology.

Still rubbish Bill? Or time for a fulsome apology?

Richard Murphy Deloittes, Secrecy jurisdictions, TUC, Tax Havens

I thought this comment on the blog worth drawing attention to:

I am not from the Big 4, Richard.I’m from Indonesia, where more than 750 foreign- based corporations keep reporting losses for years for tax purposes.

We called this practices "transfer mispricing" schemes,but we can do nothing to eradicate it. We in tax department feels desperate to cope with this situation.

I do agree and fully support the content of your column, Richard, but also want to underline the issue that transfer "mispricing" is not tax avoidance , but it is tax evasion.

It is not the form, but it is the substance that counts.

It is similar to the term "treaty abuse", where some people preferably call it "harmful practice scheme" instead of "treaty abuse scheme".

Can the people from the Big 4 dare to answer whether there is such ‘good faith’ when planning the aforementioned schemes ?

I think it is highly time to CHANGE

Will the Big 4 rise to the challenge?

We’re waiting to hear from you. When will you stop assisting this abuse of developing countries?

Richard Murphy Accounting, Corruption, Deloittes, Development, KPMG, PWC, Tax evasion

Gordon Brown has demanded that the OECD look at tax avoidance as part of the anti-tax haven campaign.

Let’s be realistic. The tax avoidance issue is about transfer pricing more than anything else. It comes in many forms from the blatant abuse that is frequently seen in many developing countries – where too often I see profits transferred out of these states to tax havens as a result of abusive mineral exploitation agreements – to the abusive structures that many companies create to transfer intellectual property out of the UK for the sole reason of abusing and free-riding upon the backs of the ordinary taxpayers of the UK.

I designed a mechanism to tackle this abuse in 2003. It is called country-by-country reporting. It now has backing from many of the most important development agencies in the world – Oxfam, Christian Aid, Action Aid, CAFOD, War on Want in the UK alone, and many more around the world. The proposal is simple. It demands a profit and loss account and supporting notes, including on tax paid, for every single country in which a multinational corporation trades – including details of intra-group trading. This will provide considerable information likely to indicate those who are transfer mispricing, and as such either tax avoiding or evading as a result (and in this area it’s hard to differentiate which).

None of these agencies have become interested in accounting standard reform for fun. They have been convinced that accounts can deliver enormous benefit for ordinary people ,and most especially those of developing countries who could secure $160 billion as a result of this reform according to Christian Aid. That’s enough to pay for the Millennium Development Goals.

I am aware that this reform is opposed by PricewaterhouseCoopers, Deloittes, Ernst & Young and KPMG. Between them they effectively control the International Accounting Standards Board which is going to confirm in April that they think that the only relevant users of accounting data are those who trade capital in financial markets – the very people who have brought the world’s economy to its knees.

The G20 committed the world to one set of accounting standards. It did not commit itself to the standards issued by the IASB – which have quite clearly contributed to the problems to date.

I am under no illusion that we have a fight on our hands on this one. The partners in the Big 4 seem determined, by deliberately ignoring this issue, to keep the poor of the world on incomes of less than $1 a day – to feed their own greed. I stress – in my opinion this appears to be a conscious choice on the part of those firms. This is a choice they have made knowing they could eliminate that poverty by ensuring that tax is paid in the right place at the time and in the right amount by all taxpayers – where right means that the economic substance of the transactions a person (human or legal) undertakes matches the form in which it is reported for tax. Not one partner in these firms appears to have the courage to stand up and say that the systems they promote, which ignore this principle, condemn at least 1 billion people to poverty. Not one. That’s why I am sure it is a choice they have made.

And remember the Big 4 are also collectively the only organisations that are universally present in every major (and most minor) tax haven in the world, as a result of which these firms underpin the whole network of corruption that tax havens create even if they themselves never undertake a single illegal act.

Accountancy is at the forefront of the debate on beating poverty in this world now. I never thought I’d say that. But it is true. And it is a battle that is winnable simply because the gains are so readily apparent for everyone but the Big 4.

We won’t win yet – but as governments become desperate for revenue the abuse these firms facilitate for their clients will become increasingly apparent – and will be beaten.

And with it the corporate use of tax havens would end almost overnight. As Barclays have proven – no one wants to be shown to be abusing these places and this reform would detail everyone who was doing so. Reputational risk would then destroy the market for good.

You can see why Oxfam, Christian Aid, Action Aid, CAFOD, War on Want and others are convinced. Now it’s time for the Big 4 to join them.

But will they? Many people in those firms read this blog. Will one have the courage to respond?

Richard Murphy Accountancy, Country-by-country, Deloittes, KPMG, PWC

Any quoted company has to file accounts that include a tax reconciliation statement.

The statement is meant to explain the difference between the tax rate in the accounts and the statutory tax rate.

RBS has admitted tax avoidance of £500 million today.

This is its tax reconciliation statement in its 2008 accounts:

The only line in there where this could hide would be ‘non taxable items’. They’re a credit – the only one there is year in year out.

Is that good enough?

If this is where the tax avoidance is hidden is that a set of accounts really giving a true and fair view?

I’ll say this to Deloitte LLP: this is ‘just rubbish’.

And I now have the satisfaction of knowing I’m right and Deloitte LLP is wrong.

Richard Murphy Accounting, Banking, Deloittes, Tax avoidance, Tax gap

Accountancy Age has reported that:

The latest Deloitte survey of finance directors’ outlook reveals the number of companies looking at moving their corporate base outside the UK to a cheaper tax regime more than doubled in the third quarter - up from 13% to 29%.

No doubt some of the banks were included.

Which just about sums up the state of play. The Big 4 and their clients want the government to bail them out. They don’t want to pay for it.

There’s a lot of change going to be needed if we get through this.

The Big 4 will, I think, be amongst the casualties unless they change their spots, soon.

Richard Murphy Banking, Corporation Tax, Deloittes, Ethics, Tax avoidance

From the Observer today, commenting on the failure of Dutch / Belgian bank Fortis:

Fortis’s accounts were jointly audited by KPMG and PricewaterhouseCoopers - two of the big four practices. They have received audit fees running into tens of millions. But they seemingly failed to give investors an indication that Fortis was heading for severe problems.

‘The basis of an audit is the assessment of risk,’ said forensic accountant Richard Murphy. ‘These people, I believe, fundamentally failed to assess risk. They were responsible. That’s what their job was. They didn’t do it. We have to look at different audit systems for the future [and in the UK] the National Audit Office should now be protecting the taxpayers’ investments in banks. We can’t rely on the big four.’

Auditors at Bradford & Bingley, Northern Rock and a host of other institutions [also] failed to sound the alarm over the significant risks in these businesses.

KPMG and PricewaterhouseCoopers prefer not to discuss Fortis’s case, though representatives say it is unfair to pin the blame for destruction of global firms solely on them. They argue that credit rating agencies who gave ‘Triple A’ assessments of sub-prime bonds, and regulators who failed to bear down on over-leveraged institutions, must also share responsibility.

Two things follows:

1) KPMG et al say they audited within the rules, i.e. they confirmed ‘market value’, but what they do not say is they set the rules, and they were also responsible for suspending the previous rule that required a ‘true and fair over-ride’ meaning that the auditor had to do more than follow the rules.

2) There is no future for those who set the rules wrong. the Big 4 did that. Amongst the money things we’ll have to get right are new rules for auditing, as well as accounting. But in the meantime I cannot see who but the National Audit Office (with all its faults) that can protect HMG’s investments in banks.

Richard Murphy Accounting, Deloittes, Ernst & Young, KPMG, PWC

I was interviewed for this story in Accountancy Age:

Offshore tax probe hits the buffers

I’m not mentioned in the resulting piece. And I really don’t care: that’s what happens with 50% of all interviews, and it’s part of life.

I do care that the story is so very obviously wrong. I don’t for one minute believe that HMRC’s:

crackdown on offshore accounts is facing mounting problems this week, as the timetable drags on attempts to hit tax evaders hard.

Indeed, far from it. I believe it is going well. At least as well as can be expected given the enormous scale of abuse that has been discovered. And the fact that no prosecution has yet been announced is entirely appropriate. I’d expect it to take at least two years for investigations to get to that stage, and I’ve done my fair share of tax investigations in my time.

So what’s the real story here? Bluntly it’s this: that the Big 4 want to undermine this enquiry. Last weekend we had PWC blatantly calling for offshore investigations to be halted. Put it another way and that’s asking for a licence to tax evade. There’s no other reasonable interpretation.

Now we have E & Y saying:

On a score of one to ten I would probably give the investigation six to six and a half,’ said Bob Brown, global leader for tax and investigations for Ernst & Young.

‘The quality of information [on offshore accounts] is not as good as they thought and they lack enough experienced investigators to run with this,’ he said.

Of course, if E & Y cooperated the Revenue might have rather more of the information they need. I think it very unlikely that they are. What they will actually be doing is going as slowly as possible and delaying supplying information for as long as possible. The reason is obvious. As HMRC say:

We have opened enquiries into nearly 12,000 offshore accounts and will proceed with a further 79,000 over the next two years. We always knew the scale of the offshore disclosure project would be significant and we are fully resourced to carry it through.

I’m sure that’s true. But PWC and E & Y are doing their damnedest to make sure as many cases are not being opened as possible, I’m sure. Delay on already open cases will help that objective by tying up HMRC resources. And creating bad publicity for HMRC is designed, I have no doubt, to bring the process to a premature end when what HMRC are actually doing is a vital job protecting society from those who perpetrate fraud.

Frankly these firms disgust me. It’s in all our interests that offshore abuse stops. But these firms sell it and they protect it.

I’ve said it before, and I’ll say it again. If taxation is the foundation of democratic government then the four biggest threats to democracy in the world are not North Korea, Afghanistan, Iraq and Iran. They’re PricewaterhouseCoopers, Ernst & Young, Deloittes and KPMG.

These firms work deliberately and ruthlessly to undermine the taxation revenues due to democratic governments. I can think of very little that can do more to destroy society as we know it and have enjoyed it. As such they are a cancer destroying our democratic way of life. And like all cancer they need to be cut out and destroyed as soon as possible if the patient is to have any chance of recovery.

Richard Murphy Accounting, Deloittes, Ernst & Young, KPMG, PWC