Monday 23rd of October 2017

on smoke & mirrors ...

smoke & mirrors ...

Without a word of explanation, and barely legally if legally at all, dozens of multinational companies have given “the bird” to regulators, have quietly chosen to file financial statements which conceal their transactions and help them – the biggest companies in the world – funnel billions of dollars in profits overseas, untaxed. This is an investigation of the conspiracy of secrecy and deception by global accounting giants EY, PwC, KPMG and Deloitte.

“Smoke and mirrors”. That’s how financial reporting by multinational companies can be described. Over the past ten years, reporting standards have fallen off a cliff. This comes at a heavy price for ordinary tax-paying citizens.

This is part of a litany of failures on the part of the accounting profession and regulators. Regularly, we see holding companies at the head of billion dollar businesses which do not bother to prepare consolidated accounts.

Take BUPA, British-owned and Australia’s biggest healthcare group. Take Wall Street giant Goldman Sachs, financial services leviathan Mastercard, Swiss coal miner Glencore or hard-earned thirst-quencher SAB Miller.

What do they have in common? Their financial reporting in Australia is meaningless. All signed off by the global audit firms and all glossed over by governments and regulators. When challenged, when contacted for comment about these failures, directors and auditors have nothing to say. They simply hide behind their PR people.

With monotonous regularity we see the Australian holding companies of the world’s biggest corporations have ceased preparing “general purpose” accounts altogether, switching instead to useless “special purpose” accounts. Pulling down the shutters of disclosure, conjuring darkness.

This magic show has been co-directed by the Big Four accounting firms: PWC, EY, KPMG and Deloitte. And just like the finest of magicians, these illusionists keep mum about their tricks. Nobody can explain why billion-dollar multinational holding companies have stopped preparing consolidated accounts.

The standards-setter, Australian Accounting Standards Board, purports to be doing something but the reality is that AASB, a puppet of the Big Four, has been dithering for two years since the problem was exposed before the Senate Inquiry into Corporate Tax Avoidance in 2015.

Quis custodiet ipsos custodes?

Who then is guarding the guards? As the guards of audit sank into a deep slumber over the past decade, multinational companies discovered the Big Four Genie, the Genie of Disingenuity. Rub that lantern the right way – pay the Big Four millions of dollars in fees, that is – and the genie springs into action and subverts Australian laws and standards for you.

The Big Four Genie has granted multinationals three key wishes.

Wish Number One: External Financial Reports Prepared on the Premise of Internal Use Only:

The Big Four Genie has reframed the external accounts of billion-dollar multinational companies as being for internal purposes only. That is, their financial statements matter to nobody else except their major foreign shareholder.

By granting this wish, the genie has ensured that multinational holding companies do not have to publish external financial reports that properly explain their financial affairs.

In this way, they are not accountable to Australia’s regulators, or ordinary taxpayers who they are jilting. They are only accountable to their global overlords.

Who has quietly switched to this lower standard of disclosure? But to name a few:

Ansett Australia (KPMG), the year before it went bust.

Rupert Murdoch’s News Australia Holdings (EY) in 2014.

BMW Australia (KPMG) 2014.

Unilever Australia (KPMG) 2014.

Johnson & Johnson (PwC) 2014.

Pfizer Australia Holdings (KPMG) 2014.

Serco Australia (Deloitte) 2013.

Oracle Corporation Australia (EY) 2014.

The scandal-ridden Fuji Xerox (EY) 2015.

Sanofi‐Aventis Australia (EY) 2013.

Novartis Australia (PWC) 2014.

BUPA Australia Healthcare Holdings (KPMG) 2014.

Merck Sharp & Dohme (PWC) 2014.

Roche Products (KPMG) 2014.

Proctor & Gamble Australia (Deloitte) 2014.

Robert Bosch (PWC) $382m 2014.

Adidas Australia (KPMG) 2014.

Avon Products (PWC) 2010.

There are many more. What has the AASB, the standards-setter, have to say about this? What do professional bodies CPA Australia and Chartered Accountants Australian & New Zealand CAANZ) say? What does the finance press have to say about it? Not a whisper; they are collectively dumbstruck by the Genie.

Special purpose audit reports for multinationals in Australia are prepared on the premise that the only user of the external financial report is the multinational itself. There is one master and one stakeholder.

The Big Four Genie could hardly care less about the public interest. Consider the mercenary detachment of KPMG in its audit report of BUPA ANZ’s most recent special purpose accounts:

“Our report is intended solely for the members of BUPA ANZ Healthcare Holdings Pty Ltd and should not be used by parties other than members of BUPA ANZ Healthcare Holdings Pty Ltd. We disclaim any assumption of responsibility for any reliance on this report…” etc.

The truth is that BUPA has a member (singular) rather than members (plural). The member (or shareholder) – UK company, BUPA Investments Overseas Limited – is an all-powerful owner that can demand financial information from BUPA ANZ whenever and in whatever form it wants.
The member has no reasonable use for an external financial report from BUPA ANZ.

The external audited accounts required by Australian law are not for the benefit of this single member.  They are required because of the economic significance of BUPA ANZ to other stakeholders in Australia such as creditors, employees, customers and government agencies including the Australian Taxation Office.

The Big Four Genie has made regulators believe in a fairytale while making the original intention of the Australian standards and laws vanish.

Wish Number Two: Switch from General Purpose to Special Purpose Accounts Without Explaining Why.

Multinational holding companies like BUPA used to prepare general purpose financial reports with full disclosures of related party transactions and balances.

But the multinationals wished that these disclosures would go away and presto, the Big Four Genie, granted their wish.

Why? What could all these multinationals now hide? While general purpose accounts are required to comply with disclosure requirements across more than 40 accounting standards, special purpose accounts may follow as few as five.

Special purpose accounts allow multinationals to avoid the statutory audit of transactions and balances with related parties in foreign jurisdictions, including tax havens. No annual audit means no regulatory oversight problems for the multinationals.

Consistent with the Genie’s anti-public interest doctrine, uncommercial arrangements or potentially fraudulent transactions are no longer subject to regular annual independent review.

During the Senate Inquiry hearings into corporate tax avoidance held in November 2015, no representatives from the Big Four firms could answer questions about why their multinational clients had been allowed to switch from general purpose to special purpose accounts. Since, as standards deteriorated further, no explanation has been forthcoming.

Switching from general purpose to special purpose accounts necessarily gives rise to voluntary changes in accounting policies, for example, the cessation of consolidation accounting for subsidiaries.

Accounting standards only permit a voluntary change of accounting policies if the change results in financial statements that provide more relevant financial information about an entity’s financial affairs.

A multinational like BUPA is a large proprietary company because of its consolidated revenues and consolidated assets. In fact, BUPA ANZ is one of the largest proprietary companies in Australia. Non-consolidation of subsidiaries results in less relevant rather than more relevant financial information.

In contrast to consolidated financial statements, non-consolidated financial statements cover only a part of the economic activities that are under the control of the holding company. Voluntary changes in accounting policies are also subject to disclosure requirements including inter alia the reasons why applying the new accounting policy provides reliable and more relevant information.

This is a required disclosure not an optional disclosure. In the case of BUPA ANZ, it is a vanishing disclosure because it was never made. The Big Four Genie has simply made it disappear, with no explanation, and with regulatory impunity.

Wish Number Three: Keep Everyone Waiting for Change 

Everyone knows, when dealing with a genie, the third and final wish is the most important of all. The temptation is for the asker is to request more wishes or everlasting wealth.

Multinationals must fantasise about asking for everlasting tax avoidance; but everyone knows genies don’t do third wishes that are de facto fourth and further wishes.

Therefore, the multinational holding companies asked the Big Four Genie for the next best thing: no change to regulation which would inconvenience the current practice of filing useless uninformative unconsolidated special purpose accounts.

This is an easy wish for the Big Four Genie to grant because throwing its weight around in the regulatory landscape is what the Big Four Genie does best.

In its back pocket, the Big Four Genie keeps lobbyists in Canberra and alumni or representatives on any and all of the regulatory bodies which matter: the Financial Reporting Council; Australian Accounting Standards Board; Australian Securities and Investments Commission, CPA Australia and Chartered Accountants ANZ.

During the Senate Inquiry hearings into corporate tax avoidance, representatives from the Big Four firms implored senators not to impose new regulations requiring further information from their clients. One of them even invoked John Lennon, transmogrifying Lennon’s ‘give peace a chance’ into ‘give voluntary disclosure a chance’.

“Give thieves a chance” rhymes better.

A representative from the Australian Accounting Standards Board acknowledged the board had been working on issues around the financial reporting practices of Australia’s largest companies. Though, these issues began over a decade ago. There has been no change, even after the embarrassment of a Senate inquiry and another two years to put pen to paper.

Magically disappearing accounting regulations:

The Accounting Standards that the Big Four Genie has made disappear for multinational clients switching from general purpose to special purpose accounts are as follows:

AASB 108, para 5: Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements.

Obviously, consolidating the accounts of subsidiaries fits squarely within the definition of accounting policies.

AASB 108, para 14: An entity shall change an accounting policy only if the change:(a) is required by an Australian Accounting Standard; or(b) results in the financial statements providing reliable and more relevant information about the effects of transactions, other events or conditions on the entity’s financial position, financial performance or cash flows.

The words ‘shall’ and ‘only’ do not provide the choice to change accounting policies for other reasons.

AASB 108, para 15: Users of financial statements need to be able to compare the financial statements of an entity over time to identify trends in its financial position, financial performance and cash flows. Therefore, the same accounting policies are applied within each period and from one period to the next unless a change in accounting policy meets one of the criteria in paragraph 14.

The comparison of the BUPA ANZ accounts before and after their switch to special purpose reporting is meaningless.

AASB 108, para 29: When a voluntary change in accounting policy has an effect on the current period or any prior period, would have an effect on that period except that it is impracticable to determine the amount of the adjustment, or might have an effect on future periods, an entity shall disclose:(a) the nature of the change in accounting policy (b) the reasons why applying the new accounting policy provides reliable and more relevant information;(c) for the current period and each prior period presented, to the extent practicable, the amount of the adjustment: (i) for each financial statement line item affected; and (ii) if AASB 133 applies to the entity, for basic and diluted earnings per share;(d) the amount of the adjustment relating to periods before those presented, to the extent practicable; and(e) if retrospective application is impracticable for a particular prior period, or for periods before those presented, the circumstances that led to the existence of that condition and a description of how and from when the change in accounting policy has been applied. Financial statements of subsequent periods need not repeat these disclosures. 

Subsection (b) is an unambiguous requirement for disclosure regarding the reason/s for a voluntary change in accounting policies. This has not been done. The Corporations Act requires that directors and companies comply with Australian Accounting Standards.

There is therefore, on one very plausible view of the laws and the accounting standards, a strong case for saying there has been a systemic failure by the world’s biggest companies, and their advisors, to obey the law.

Smoke & Mirrors: the systemic campaign of multinational tax secrecy | Michael West