Deloittes » Tax Research UK

US bank accounts will not show a true and fair view

Accounting, Deloittes, Ernst & Young, KPMG, PWC, Regulation Comments Off

Jul 312008

Banks have been given a one-year reprieve by US accounting standard-setters from having to take up to $5,000bn (£2,520bn) of debt assets on to their balance sheets, easing fears that they would be forced to raise large amounts of new capital quickly.

Robert Herz, FASB chairman, said that the move was made reluctantly after a staff recommendation for a delay because there might not be enough time for all companies to adjust to the up-heaval.

As the FT notes:

Since the credit crunch, many banks have been forced to bring some such vehicles back on to their books, angering investors who did not know about the holdings.

In May, analysts at Citigroup forecast that banks could be forced to bring up to $5,000bn of assets back on to their balance sheets when the new rules came into force.

Lawmakers and banking industry groups have issued calls for a delay in recent weeks because of the potentially huge detrimental effect the changes could have on banks’ capital bases and their ability to raise new capital.

As justification:

The FASB said it had decided to change the date as a result of “comments and feedback that we received”. The original proposed date was an “ambitious” one that had been reconsidered, it said.

Mr Herz said during the meeting he was “chagrined” by what had been uncovered as the rule changes were prepared.

He added that there had been a mixture of poor reporting and a lack of proper enforcement.

Now let’s be clear what this means. Banks who have been responsible for poor reporting, which has been tolerated due to their auditor’s failing to properly enforce existing rules have submitted comment to FASB that they cannot possibly comply with new accounting rules as yet because they need to raise new capital in the meantime, and can only succeed in doing so if they can continue to misrepresent the true extent of their assets of limited worth and actual liabilities.

In a litigious world wouldn’t you think that FASB might be putting themselves at risk of class actions from future aggrieved shareholders by knowingly putting those people’s wellbeing at risk by allowing continuing misrepresentation of the true and fair view in the accounts of US banks? That seems to me to be exactly what they are doing.

I am staggered at FASB’s complicity with this abuse, and lack of willing to impose appropriate rules. I do not agree that the banks could not comply: their inability is self motivated lack of willing, which is something quite different.

And whilst this continues expect the credit crunch to get much worse as the spiral of losses goes on.

And who do I blame? There are just four audit firms who can carry the blame for failure of proper enforcement. They are of course PWC, KPMG, Ernst & Young and Deloittes. They carry an enormous burden of responsibility for the failure of accounts to show a true and fair view, a failure that allowed the credit crunch to develop.

UK Treasury Select Committee must listen to the US Senate

Deloittes, Tax Havens 1 Response »

Jul 172008

The Senate Permanent sub-Committee on Investigations issued a press release yesterday saying (no link yet):

At a Thursday hearing entitled, Tax Haven Banks and U.S. Tax Compliance, the latest in a series of hearings with insider information about the workings of the offshore industry, the Senate Permanent Subcommittee on Investigations will examine how tax haven banks facilitate tax evasion by U.S. clients, hide client and bank misconduct behind the cloak of bank secrecy laws, and add to the offshore abuses that cost U.S. taxpayers an estimated $100 billion dollars each year.

A six month-long bipartisan Subcommittee investigation examined LGT Bank in Liechtenstein and UBS in Switzerland to expose how tax haven banks are assisting U.S. taxpayers to evade taxes, in particular by urging U.S. clients to open accounts in their offshore jurisdictions, assisting them in structuring those accounts to avoid disclosure to U.S. authorities, and providing financial services in ways that do not alert U.S. authorities to the existence of the foreign accounts. Subcommittee Chairman Sen. Carl Levin (D-Mich.) and Ranking Minority Member Norm Coleman (R-Minn.) will release a 115-page joint staff report detailing the findings of the investigation in conjunction with the hearing.

“Tax havens are engaged in economic warfare against the United States, and the honest, hardworking American taxpayer is losing,” said Levin. “The iron ring of secrecy around tax haven banks and their deceptive banking practices enable and encourage tax cheats to hide assets from the United States. Congress needs to enact strong penalties on tax haven banks that help U.S. taxpayers avoid paying taxes to Uncle Sam.”

Senator Coleman said, “It is simply unacceptable that some individuals are using offshore tax havens and secrecy jurisdictions to shelter trillions of dollars from taxation, forcing working families to shoulder the tax burden. By exploiting gaping loopholes, these foreign banks are enabling felony tax evasion. Simply put, foreign banks should not be Al Capone safe-houses for evading taxes. Closing these loopholes means we must strengthen reporting requirements, broaden the scope of the audit program, and extend the amount of time the IRS has to investigate cases involving an offshore tax haven.”

I have not a shadow of a doubt that the Senate has got this story right and really understands this issue.

Now contrast this with evidence submitted to the UK Treasury Select Committee by the massed ranks of tax havens and offshore finance centre operators (the UK included). Take this from the Financial Services Authority:

These reviews have tended to conclude that OFCs per se do not pose a threat to global financial stability, and that standards of regulation are generally comparable to those that apply in other jurisdictions.

How can they be that complacent when the US is not?

Then there is this from the Isle of Man:

The Isle of Man is committed to delivering effective regulation. It complies fully with international standards. Under the auspices of the Organisation for Economic Co-operation and Development (“OECD”), it is at the forefront of the development by small jurisdictions of a network of Tax Information Exchange Agreements (“TIEAs”), based on mutual economic benefit. It has a transparent tax code, and does not have banking secrecy laws. It has consistently shown itself to be a co-operative jurisdiction in terms of the international fight against criminal activity.

The Isle of Man may have the regulation, but it clearly does not work. Read the 400 plus page report of the Senate Subcommittee in August 2006. That recounts endless abuse within the Isle of Man: the regulation does not just not work,it is persistently ignored. Senator Carl Levin made it clear in his 2006 report that he thought this deliberate. This the recurring theme of the Tax Justice Network submission to the Treasury Select Committee.

The list could go on, and on. But the tone of them all can be summarised by Deloittes who say in their submission:

The UK should respond to these issues [raised by offshore financial centres] by supporting such international efforts [to regulate them], by improving its own competitiveness, and by continuing to take proportionate measures to protect its tax base.

The implication is clear, they think there is little wrong offshore: indeed they made that claim when giving oral evidence. The problem is, they say, with the UK where for ‘improved competitiveness’ read ‘reduced tax rates’. I mentioned yesterday a trend that I think is happening in the UK where the financial system is being captured by an elite for its own purposes. The combined submissions of that elite within the tax havens and financial services companies to the Treasury Select Committee, which in combination seek to whitewash the abuse that the US Senate clearly sees to be happening, is another example of this capture of the collective common good for the advance of the personal greed of these groups.

It is essential that the Treasury Select Committee see through the charade of their combined front and realise that this is the action of a group undertaking collective deception. If they don’t we continue our sleep walk into the nightmare scenario where the common good no longer exists, and democracy goes with it (for tax havens and offshore financial services operators share a combined contempt for the democratic process).

It’s extraordinarily worrying.

Auditors: do they really make any difference any more?

Accounting, Deloittes, Economics, Ernst & Young, KPMG, PWC 2 Responses »

Jul 072008

Accountancy Age reported last week that:

The push for auditor liability limitation in the US received a boost today when an influential audit group threw its weight behind the movement.

The Centre for Audit Quality, an autonomous organization which is aimed at serving investors, auditors and the capital markets by improving audit quality, has urged the US Treasury to consider setting a cap or introduce proportionate liability to reduce the risk of the collapse of another firm through litigation

But, let’s be candid: Accountancy Age’s claim that the Center for Audit Quality is an autonomous organisation looks a little hard to sustain. Its website is hosted by the AICPA, and that is the US auditing profession by any other name. I smell self-interest in this announcement.

More important though is the comment by Francine McKenna entitled “When” another one bites the dust. She is emphatic: another failure is just a matter of time. I strongly suspect she’s right.

But as she notes, the real question is so what? She puts it at slightly more length, saying:

What do you need in the way of financial reporting assurances, audits, due diligence, attestations? Does an audit and its useless, boring boiler plate make a hill of beans difference in your investment decisions, or do you all, analysts, sophisticated investors and other stakeholders, make your own decisions based all publicly available information assuming it’s timely and accurate? Can we find a way to uncover fraud, punish fraud and warranty the financial information that is distributed to the public so that financial statements are a tool rather than a throwaway?

Right now they are a throwaway. Worse than that in fact. And the audit report has been totally debased. It’s easy to explain why. When I was auditing we sought to establish if the accounts showed a true and fair view. Now auditors don’t do that. An audit is now defined as:

The objective of an audit of financial statements is to enable the auditor to express an opinion whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework.

Remember, the change was not imposed on auditors. They chose to do it. And they chose the conceptual framework too. Fair value accounting is the result. But let’s be clear, inherent in this is a simple ‘mark to market’ concept that has meant (ludicrously) that it is assumed that all assets are up for sale at all times in every corporate’s accounts, and must be valued at current market worth. This was great when markets in financial markets could be rigged to produce the data auditors needed to show ever rising profits on behalf of their clients. But that did not prove sustainable, and now there is no market there is no price, and so we have massive right downs.

Both positions were ludicrous, but both arise because the framework is flawed: it assumes people only hold assets to sell, not to use. This is the ultimate evidence of the concept of financialisation that only accountants could really believe in. Second, the whole concept of auditing is destroyed by the convention: true and fair counts for nothing anymore because real value is not reported, only current market value. They are not the same thing, but only accountants don’t know that.

So, so what if another Big 4 form goes bust? It might just hasten the demise of the ludicrous accounting and auditing environment they created for their own benefit which is imposing massive cost on the world (like so much that the partners in PWC, KPMG, E& Y and Deloittes do). I hate to say this of my own profession, but I think that would be a good thing.

Why ask the accountants? They’re the problem, not the solution

Accounting, Corruption, Deloittes, Ernst & Young, Ethics, KPMG, PWC, Tax Havens Comments Off

Jul 072008

On Thursday (when I was at a conference and out of blogging action) the FT reported that:

The US Internal Revenue Service is to solicit the help of the world’s top accounting firms in its widening effort to clamp down on offshore tax evasion.

The IRS is planning to speak on Tuesday to six accounting firms about how they could help find foreign banks that fail appropriately to identify US customers holding investments or income in offshore accounts, according to people briefed on the plan. A conference call has been scheduled between the agency and Deloitte, Ernst & Young, KPMG, PwC, Grant Thornton, and BDO Seidman, they say.

This is absurd. The firms in question are some of the principle architects of tax haven structures. They are the almost universal consistent element to be found in every offshore financial centre. The know they have created a world in which tax evasion is not only possible, but happens. They helped created it to make money. They’re not going to kill the golden hen that brings them so much profit.

It’s precisely why PWC and Deloittes joined with Citi and HSBC to offer bland and inane comments on tax havens to the Treasury Select Committee last week.

It’s why in Tax Havens: Creating Turmoil I argue that it is the accountants as well as the lawyers and bankers who need to be regulated now. It is precisely because regulators continue to make this sort of elementary mistake in the approach they are taking by somehow thinking the accountants are on their side that I am convinced the change we propose is essential.

Bill Dodwell is busy

Deloittes, Richard Murphy 3 Responses »

Jun 132008

Accountancy Age has noted my challenge to Bill Dodwell, head of tax at Deloittes, and put it on its back page:

Which gives me the perfect opportunity to provide an update on Bill’s response. He is, he says ” sorry that I do not have time to meet.”

What, never? Your diary is booked form now to eternity Bill? Amazing.

PS Yes, you’re right AA: some claim tax rates have fallen around the world. But if you’re a little more statistically sophisticated and weight these things by population or GDP per head you’ll find that it’s not by nearly as much as thing’s like KPMG’s tax rate survey would imply. In fact, it’s not by very much at all. Certainly not enough to explain that graph, which was, after all, for UK companies. And the UK tax rate was a constant throughout that period and so were the companies in the survey.

That question does need answering, not least because some of the data in the survey was audited by Deloittes.

Questions for Bill Dodwell

Accounting, Deloittes, Ethics, Tax gap 6 Responses »

Jun 062008

Bill Dodwell, head of tax at Deloittes UK ha suggested my work on the Tax Gap is ‘just rubbish’. Well, it’s a free country, and he has a right to his opinion.

He also has a right to his own particular use of the term tax avoidance, about which we clearly do no agree. His own remarkable use of it includes the claim that ‘this is a relatively new term in the tax lexicon’, which does make me wonder where he’s been most of his career.

That’s especially because later in the same article he suggests that ‘I’ve no doubt that there is still some tax avoidance (although it’s been greatly reduced by the change of atmosphere over the last few years, coupled with tax disclosure)’so implying that this new beast is already an historical anachronism.

For a man whose whole argument that my work is ‘just rubbish’ relies entirely on challenging my use of the term ‘tax avoidance’ this confusion about a term that has been in long term common usage, where that common usage would accord with the use I have made of it, is at the very least surprising. His use of the term is one of the issues I’d like to debate with him.

But there’s another issue I’d like to discuss as well. That is this graph, produced from a completely objective analysis of the data published by the companies in the survey I undertook, showing the trend in effective UK corporation tax rates for the largest FTSE companies during the course of this century. Some of that data was audited by his firm. It has to be right.

You’ll note the trend is strong, and downward, and produces effective rates way below any reasonable weighted average of the tax rates of the major populous states of the world where most of these companies are making most of their money because that is where their labour forces and customers are located.

What I’d like to know from Bill Dodwell is this:

1. Why is the effective rate so much lower than statutory rates?;
2. Why is the rate moving so markedly downward?
3. Why does he argue in this case that the tax burden is excessive and growing?
4. Does he know how this burden compares with that of UK companies trading solely in the domestic market, and if so will he publish the data?
5. How does he reconcile the difference between the rates shown?
6. What role do tax havens play in this difference, and if he claims there is none why is his firm in all the major and most of the minor tax havens in the world?
7. As a UK resident does he think this trend desirable, and why?

I’m looking forward to the debate.

Deloittes, making themselves look stupid

Deloittes, Ethics, Tax avoidance, Tax compliance, Tax Havens Comments Off

Mar 132008

Accountancy Age has reported that the Budget should raise £1.7 billion form anti avoidance measures, most aimed at companies. This, of course, is welcome, but we’ve a long way to go in thta case.

One of the really welcome changes has been the attack on partnerships and trust avoidance in controlled foreign companies. as the Age notes:

The rules announced in the Budget will hit CFCs with voting shares held in off-shore trusts and prevent corporates from structuring CFCs as partnerships. The moves are expected to net £400m for the government by 2010.

Let’s be clear. These arrangements are wholly artificial, wholly non tax compliant and are abusive attempts to save tax by the use of tax havens. So what did Bill Dodwell, head of tax policy at Deloitte have to say:

The CFC crackdown was particularly surprising. The structures that have been blocked are widely used and the changes are very unhelpful

Unhelpful?

Is stopping anti-social behaviour unhelpful, Bill? I don’t think so. And I don’t think you could justify it.

If you can, debate it with me.

Liechtenstein: The Big 4 are there and are ashamed to admit it

Deloittes, Ernst & Young, Ethics, KPMG, PWC 1 Response »

Feb 182008

Liechtenstein is tiny: it is 15 miles long, has a population of under 35,000 and one main town. It’s existence is effectively the consequence of a bad real estate deal by the Holy Roman Empire in the 18th century; it became a sovereign state in the 19th century. But that’s a joke. Even its so-called royal family took 120 years to first go there after ascending to the throne. If evidence is needed that this is a place set up for the convenience of those located elsewhere, that’s a good first sign. The fact that half its work force don’t live in the country is another.

There’s another curious fact about Liechtenstein though. All four of the Big 4 accountants are there. And three of them seek to hide it on their web sites. KPMG has a brochure on its offices in the place. It’s not on their site selector on their main web site though.

I can prove PWC are there from this publication. But again, search their main web site and look at their office locater and mysteriously there is no mention.

I know Ernst & Young are there from local directories. But, again, you won’t find a mention on the global office locater.

Deloittes meanwhile hide it under Switzerland. But they’re there all right.

Why this marked coyness on the part of these publicity crazed organisations? Could it be that they know there is no reason for them to be there for the local economy? If there was then they’d all be in King’s Lynn in Norfolk – a place that happens to have an almost identical population and no office of the Big 4 for many a mile around. Incidentally, it’s main business activity is agricultural and light business, much like Liechtenstein, bar one thing, and one thing only. And that’s Liechtenstein’s financial services sector. This is the only reason that the Big 4 are in Liechtenstein. Nothing else can explain it.

So why are they so embarrassed about their involvement in the place? Could it be that they’re too painfully aware of the fact that it has, as the CIA Factbook puts it:

strengthened money laundering controls, but money laundering remains a concern due to Liechtenstein’s sophisticated offshore financial services sector?

Or is it that they know that Liechtenstein’s financial services industry is based on the foundation, about which I wrote earlier today, and that the sole purpose of these foundations is to operate outside its domain to undermine the imposition of regulation in another sovereign state? Tax is, of course, one regulation that is evaded. It may not be the only one.

Or could it be that they know that Liechtenstein is now just one of three places in the world refusing to cooperate in any way at all on tax haven information exchange?

Or is it just that they know that even if they really can prove that not one of their clients evades a penny in tax, their presence in a location where it is clear that tax evasion is rampant provides credibility to a place whose business model appears to be built on this activity?

Or could it be that in the case of KPMG where the partners in the UK, Germany and Switzerland have approved a proposal to merge, that this means that KPMG’s German partners are actually responsible for the Liechtenstein operation, which has ‘close cooperation’ with the KPMG Swiss firm, as its own brochure puts it? Is that just a little too uncomfortable for them right now?

Whichever way you look at it though, why are these firms allowed to continue to work for any government whilst they continue to operate in this most abusive of places? Can anyone, anywhere justify them having that right when they support a state whose raison d’etre appears to be to undermine the law of other places? If so, please let me know.

Deloittes are repugnant

Accounting, Deloittes, Ethics, Tax avoidance 1 Response »

Feb 072008

I’ve been sent a report from the Irish Examiner from December 2007. It says:

THE Revenue Commissioners have discovered a €200 million tax avoidance scheme involving a leading accountancy firm and motor dealers selling 4x4s.

The scheme, criticised by the country’s top revenue official as “repugnant”, relies on a purported ambiguity in the 1992 Finance Act that the accountancy firm promoting it, Deloitte, claims exempts 4x4s from vehicle registration tax (VRT).

Motor dealers involved in the scheme have so far lodged €170m in claims for repayment of VRT but Revenue chairman Frank Daly said more claims were expected.

“It has the potential to deprive the exchequer of €200m. It’s a try-on. It’s repugnant to me. Its intention is to get a windfall benefit for a very small group of motor dealers and the accountancy firm, at the general expense of the exchequer and every other taxpayer in the country.”

While not illegal, Mr Daly said it was “unacceptable behaviour”, which left him very disappointed. “This is a type of behaviour by accountancy firms that makes me wonder how I can be positive about this profession,” he said. “I can assure you we will fight it,” he continued, later adding: “Nobody will get a penny out of this.”

Deloittes, repugnant? When they behave like that the description sounds quite right.

Frank Daly’s description of the profession doing this sort of thing is horribly accurate.

What should be made clear is that firms who do this dort of thing are not pillars of society, they are actively working to undermine society. I don’t like anti-social behaviour. I especially don’t like it from people in suits.