Tax Research UK

The Economic Times of India has reported:

The questioning of Ramesh Rajan, chairman and CEO of PricewaterhouseCoopers, India (PwC) by CBI last week, has revealed that the Satyam balance sheets were in fact audited by Lovelock & Lewes and not Price Waterhouse (PW).

It is also learnt that the auditing fees, though deposited in the name of Price Waterhouse, Bangalore, was later transferred into the account of Lovelock & Lewes. "It is from here that the partners S Gopalakrishnan and Srinivas Talluri withdrew the money," sources involved in the investigation of the case told TOI.

Apart from Rajan, other senior partners of PW, from Delhi and Kolkata, were also summoned by the CBI last week. The partners denied any association with PW, Bangalore and said that Gopalakrishnan and Talluri were not entitled to sign any balance sheet on behalf of PW.

"So as it turns out, the auditors who are partners with PW, Bangalore, wrongly signed under the name of PW, and also outsourced the work to Lovelock & Lewes," said sources adding that investigations confirm that the entire auditing team at Satyam is from Lovelock & Lewes.

On being questioned by CBI about this "outsourcing" of work , Rajan, who is also a partner with PW, Bangalore said that the firm has no manpower and, hence, as part of an internal arrangement gives out their work to Lovelock and Lewes. "But this is not acceptable, considering that the two firms are completely different entities," said sources.

An India-based auditing firm, Lovelock & Lewes, though is a network firm of the international consulting body PwC, has no authority to audit under PwC’s name. The CBI is now in the process of recording Rajan’s statement and also plans to summon other partners of PW, Bangalore for questioning, later this week.

As Dennis Howlett says on this:

Are you kidding me? So let’s get this straight:

PWC were the auditors of record but didn’t do the work
PWC audit partners signed off
PWC received fees and then paid to an associate firm
but..they didn’t do the work and, by implication are not therefore to blame AND
Lovelock and Lewes are a PWC network consulting firm.

The question surely must be: How deep a hole does PWC want to dig for itself because this now takes on an entirely different flavour?

Satyam is a US listed company. There are strict rules about what entities can audit public companies. Lovelock & Lewes would fail that test. By implication, PWC has failed that test.

Bring on the lawyers.

But still this firm is treated as being a key player within the world financial services system, and a provider of assurance of compliance with regulatory requirement.

When all along it is perfectly obvious that it is ethically bankrupt.

How long can this last before the whole edifice of auditing collapses? And what then for the operation of markets? I seriously hope these questions are being asked, because they need to be if another sort of crash, that right now seems inevitable, is to be avoided.

Richard Murphy Accounting, Big 4, Ethics, PWC

David Drew, MP for Stroud in Gloucestershire has tabled amendments to the Parliamentary Standards Bill which should put the cat amongst the pigeons. The first says:

(1)    This section applies without prejudice to any rules made by the IPSA pursuant to section 5.

(2)    A person to whom this section applies must file an Annual Financial Disclosure Statement, in a manner to be specified in regulations, providing the following information—

(a)    copies of his tax returns for the last three years ending on 5 April prior to the date of submission of the Annual Financial Disclosure Statement; and

(b)    details of any assets in the form of property or shares that he owns or controls at the date of submission of the Annual Financial Statement.

(3)    This section applies to any member of the House of Commons and House of Lords.

And the second this:

(1)    All persons to whom this section applies must publish, in the circumstances prescribed by this section and in the manner to be specified in regulations the following information—

(a)    his tax return for the last year ending 5 April prior to his declaration as a candidate; and

(b)    details of any assets in the form of property or shares that he owns or controls on the date of his declaration as a candidate.

(2)    This section applies to any candidate for election to the House of Commons who spends more than £1000 on his election campaign.

I wholeheartedly support this move.

Richard Murphy Ethics, Tax management

The FT has reported:

In a 66-page report expected to be endorsed by heads of government at next week’s G8 summit in Italy, ministers agree “a re thinking of the framework of the global economic and financial system is critical”.

“A set of common principles and standards governing international economic and financial activity is an essential foundation for stable global growth,” the report says, laying out the proposed Lecce framework, named after the baroque Italian city where the ministers met this month.

The report, seen by the Financial Times, recommends the “global standard” cover such areas as executive pay, corruption, banking, corporate governance, taxation and markets.

The focus is on improved ethics.

And I agree, we need them.

But let’s be clear, such appeals are not enough. I’ve been around long enough to know that the only ethic in the City and in my profession is making money. The only thing that constrains them is fear of being exposed. The only way to alter outcomes is to change available structures.

That is why we have to change the structure of banking.

That is why we have to curtail the likes of Barclays.

That is why we have to split traditional and casino banking.

The case is so obvious that even the Bank of England buy it. So why, oh why, can’t our politicians?

Ethics are good, but ethics aren’t enough right now. I hate to say that, but the case is clear.

Richard Murphy Banking, Economics, Ethics

I drafted the Tax Justice Network / Association for Accountancy and Business Affairs code of conduct for tax in 2007 ( summary here). It attracted some attention at the time at selected addresses in Paris and London SW1, but there was not a lot of strong positive feedback right then. Being nice to banks was in vogue.

Not ant more.

In another indication that the world is moving (albeit not as fast, and not as far as I’d like, but moving nonetheless) in the direction of tax justice the Guardian has noted:

Banks which help their customers to avoid paying tax will be targeted by intensive surveillance from HM Revenue & Customs under a new "name and shame" regime to be announced by Alistair Darling next week.

The chancellor is understood to have a hit list of UK and international banks which he will invite to sign his new code of conduct on tax which is designed to save the taxpayer billions of pounds lost through legal and complex avoidance schemes.

Banks that refuse to sign the code of conduct or act against the "spirit" of the current tax laws will be subjected to heavier scrutiny from the tax authorities. Darling will also make it clear that chief executives of non-compliant banks will be forced to appear before MPs sitting on the Treasury select committee. Banks are under no obligation to sign up but will be expected to answer requests from the public about whether they have signed up.

Excellent. Quite right too. make them justify their anti-social behaviour.

Predictably the tax profession is not happy:

Ever since Darling announced his intention to publish the code, there has been criticism from some tax experts about how the "spirit" of the law should be interpreted. However, a Treasury source disputed this: "It is quite clear to market professionals what the spirit of the law actually means".

I agree, wholeheartedly. The person who cannot spot that should not be in practice.

And as indication of where this will go:

The Treasury source said: "We will start with the big banks and work through the system."

"We have some confidence that Barclays will sign up to it," the source added.

The source said: "There will a lot of embarrassment and public pressure and trips to the Treasury select committee to be humiliated by a lot of MPs. This is a name and shame policy".

Just what I wanted.

And excellent news for the ordinary taxpayers of the UK, because this is going to swing the pendulum of obligation to pay back towards the banks. And that’s the right thing for our economy. They have abused for far too long. And now the game is up.

Richard Murphy Banking, Barclays, Code of Conduct, Ethics, Tax avoidance

I had dinner with, amongst others, a transfer pricing specialist from the Big 4 last night.

Over dinner he said “You know Richard, what you do would be so much better if you did not refer to tax avoidance".”

To which I replied along the lines of “Well, you would say that wouldn’t you? That’s what you sell”.

He had no problem with that. I explained I did. He challenged me about why that was so. I explained that in my opinion the Big 4 firms have two fundamental purposes in life when it comes to tax.

First they exist to undermine the tax revenues of governments.

Second they exist to redistribute the wealth of the world from those who are poorest in the communities in which they work to those who are the richest in the communities in which they work.

As a consequence it is reasonable to assume that they undermine democracy and work to increase the tensions in society. That I suggested was not a good basis for suggesting their perpetuation.

He was not amused, but rather then engage he just said “I won’t go there".”

Why not? Are Big 4 personnel incapable of defending themselves against arguments which rely on the undeniable evidence that tax avoidance does undermine the revenue of governments and that since the Big 4s clients are the wealthiest in the societies in which they work this benefit is not evenly distributed, hence my conclusions follow? 

Apparently so.

It’s time these guys learned to put up a case for what they do bar a pile of cash.

Richard Murphy Big 4, Ethics

Polly Toynbee has written about banker’s pay in the Guardian this morning, saying in conclusion:

Wherever you go in meetings or gatherings, people are incandescently angry with the establishment. But they have nowhere to turn, no one to rally them against untouched City power or a complacent parliament. Labour, once the natural home for anti-establishment anger, is now defender of everything people want to rebel against. At the time of the crash, Brown and Darling had a choice to become the representatives of that voice but they ducked the radical moment. Instead they are defenders of the status quo, halfhearted in political and electoral reform, timid apologists for the City. What more will it take to make politics respond to popular anger?

She’s right. She was when she said this too:

The New Labour "project" was designed by Mandelson, Brown and Blair to abolish the politics of class, scorning the "politics of envy". The project has ended in abolishing the credibility and meaning of Labour itself.

As is the Guardian editorial which says:

This is a moment when everything should be changing, and yet everything seems to be staying the same. The potential stirred up by the fall of big finance and rotten politics has not led to anything fresh. Banks owned by the taxpayer are pouring out champagne in their Wimbledon marquees and justifying huge salaries on the grounds they have always used - seeking shareholder value. Only now the public is the shareholder and must pay the bills. Even the All England Lawn Tennis Club, with its new sliding roof over Centre Court, has proved to be less hidebound by tradition than the Treasury. There is an absence of shame; the establishment does not think it did anything wrong.

But it did: it did something very wrong. But as yet this is not hurting as it might.

Being candid the Tories will probably win the next election. I hate the idea. My comfort is that they are going to hate winning even more. Being in power after 2010 is going to be a torrid experience. The chance of cutting as the Tories say they will and surviving the next election is very, very low. And I accept there will need to be serious reviews of government spending – even though I challenge the Tory reasoning for this, and their likely choices of target. I hate to say it, but only then will the anger be apparent. It is not as yet. But the left most certainly need to be prepared for it, starting now.

And I think there is a chance that will be the case.

But whether Labour will deliver it is hard to say.

Richard Murphy Economics, Ethics, Politics