Accounting for Errant Auditors
Posted by Pratap Chatterjee on September 14th, 2007
The U.S. Securities and Exchange Commission (SEC) brought charges against 69 accountants for failing to register with the Public Company Accounting Board (PCAB) earlier this week. This somewhat obscure action is the latest ripple in the wave of crackdowns that followed the Enron accounting scandals in 2001 -- to break up the all too cozy relationship between auditors and the multinationals that they are supposed to be policing.
Governments allow companies to close their financial books at the end of the fiscal year, if a qualified accountant has signed off on it. The problem is that both the companies and the auditors are private entities whose ultimate motive is to make a profit, so there is potential for one or both of the two not to report any cooking of the books, unless they know that a regulator might catch them and discipline them. And in the last two decades, as favored accountants have been rewarded with multi-million dollar non auditing consulting gigs (such as tax planning or management consulting), the worry was that they were looking the other way in order to win more business.
Following the Enron scandal, which showed that Arthur Andersen, the company's auditor, had failed in its public duty, the U.S. Congress passed the Sarbanes-Oxley law in 2002 that replaced the accounting industry's own regulators with the Public Company Accounting Board with subpoena and disciplinary powers. Auditors are supposed to register with the board, but clearly not everyone took this seriously.
The SEC's enforcement director, Linda Chatman Thomsen, said that Thursday's action showed that the agency "is committed to ensuring compliance with the regulatory framework Congress established for auditors of public companies." A total of 50 of the errant accountants settled the charges with the federal agency the very same day.
This action is an important warning shot across the bows to let the auditors know that the SEC is checking up on them. But the jury is still out as to whether the SEC will go one step further and prosecute auditors who fail to report companies that are cooking their books.
In related news, a new study from the University of Nebraska suggests the whistle-blowers who report violations of the Sarbanes-Oxley Act to agencies like the PCAB are not properly protected. The study looked at 700 cases where employees experienced retaliation from companies for whistle-blowing and found that a mere 3.6 per cent of cases were won by employees.
Richard Moberly, the study's author, argues the findings "challenge the hope of scholars and whistle-blower advocates that Sarbanes-Oxley's legal boundaries and burden of proof would often result in favourable outcomes for whistle-blowers."
The Financial Times reports that Louis Clark, president of the Government Accountability Project, a non-profit organization that lobbies for whistle-blowers, calls the law "a disaster." Jason Zuckerman, a lawyer at the Employment Law Group, a law firm that represents Sarbanes-Oxley whistle-blowers, says: "Part of the problem is that investigators misunderstand the relevant legal standards and believe that a complainant must have a smoking gun -- that is, unequivocal evidence proving retaliation."
The debate is still on
over whether Sarbanes-Oxley is effective five years after the law was
passed, although all appear to agree it was a step in the right
direction. The proof of the pudding, they say, will be in the eating,
so we eagerly await the day that SEC puts errant accountants behind
Will the Pope tell Gucci and Prada to please pay their taxes? (Mick Jagger and Microsoft too!)
Posted by Tonya Hennessey on August 14th, 2007
In the next few days Pope Benedict plans to issue his second encyclical – the most authoritative statement a pope can issue – which apparently will focus on social and economic inequity in a globalized economy. In the statement, he is expected to denounce the use of tax havens as socially-unjust and immoral in cheating the greater well-being of society.
According to the Times (UK) newspaper, the statement may have been inspired by a recent request to the Vatican by Romano Prodi, the Italian prime minister, who urged church leaders to speak out on tax evasion.
Prodi’s government plans to seek taxes on undeclared earnings of €60 million ($84 million) by Valentino Rossi, the world motorcycling champion. How about also asking Gucci and Prada, some of Italy’s best known fashion designers, to move their tax headquarters back to home turf (from the tax-saving Netherlands, see below) and contribute to Italy’s budget deficit?
As global capital has progressively unbound itself from traditional national constraints, excessive off-shore wealth seemingly knows no shame, with wealthy individuals and corporations setting up front companies abroad to avoid paying taxes, supported by a new class of financial services specialists.
While Caribbean island resorts are often assumed to be the places where the wealthy stash their money away for retirement, some European countries (and I don't mean Lichtenstein) have also newly seen the light.
A favored location is the Netherlands -- check out the November 2006 report by Dutch-based SOMO, "The Netherlands: A Tax Haven?" The report is the first comprehensive analysis of the complex system of double tax treaties, tax incentives, the relationship with the Netherlands Antilles and the now 20,000 and counting mailbox corporations operating within the borders of this small European nation. According to SOMO, "examples of companies with tax-induced headquarters in the Netherlands are Volkswagen, IKEA, Gucci, Pirelli, Prada, Fujitsu-Siemens, Mittal Steel, and Trafigura."
The issue has been in the news, mostly because big name musical artists (like Bono and Mick Jagger) and famous athletes (think David Beckham) have also been getting in on the act. When it comes to evading taxes on lucrative licensing and royalties, the Netherlands is fast emerging as the hip tax haven of choice because Holland levies no tax on earnings royalties.
In an article titled “Gimme Tax Shelter”, the New York Times reported on this in February 2007 as newly public documentation surrounding the assets and wealth-transfer plans of the Rolling Stones demonstrated that the wily rockers have paid a mere 1.5% (as opposed to the British tax rate of 40%), or $7.2. million, on $450 million in earnings routed through the land of tulips with the help of their company Promogroup.
"The Caribbeans are thinking about trading profits, not royalties, so the smaller European countries like Holland have had to be creative, tax-wise,'' David Pullman, an investment banker in New York who caters to entertainers and athletes told the New York Times. ''They are going for the high-end stuff and don't want to be seen as shady like some Caribbean haven.''
More scandalous was the 2006 revelation that super-rockers U2 had transferred their song-publishing catalog from Ireland to Holland's Promogroup, in order to avoid a change in Irish tax law introducing taxes on royalties earned in excess of 250,000 Euros per year. Much ado was made of Bono's unwillingness to pony up his share of the tax obligation in service of the global debt relief and poverty eradication for which he so famously advocates.
Another European country that has figured they can make money out of tax evasion is Ireland -- whose “Celtic Tiger” growth is largely the product of charming huge corporations like Dell, Google, Microsoft and Sun Systems to move much of their intellectual property patents over to subsidiaries in the land of Eire -- where the corporate tax rate is 12.5%, but no taxes are charged on royalties.
Microsoft has been a major beneficiary of this scheme for the last four or so years -- it slashed billions in tax receipts to the U.S. Treasury -- by setting up subsidiaries Round Island One and Flat Island Company in Dublin. Recently Microsoft took things a step further by re-registering the two patent-holding entities as unlimited liability companies which have no obligation to file their accounts publicly.
Indeed, the Sunday Independent (Ireland) reports that Ireland was the most profitable location for U.S. multinationals between 1998-2002, during which the “the profits of US companies with Irish facilities doubled.”
The Irish law exempting patent income from taxes also provides a sweet loophole for corporate executive pay. In November 2005 it was reported that Dell Ireland’s top executives were reaping the fruits of sumptuous pay, and saving the company taxes: between them the senior management shared nearly $3.8 million in tax-free dividends since 2003.
These corporate tax breaks have earned Ireland the distinction of being hailed “the world’s 7th freest economy” in 2007 by the conservative, DC-based Heritage Foundation, which says that “Ireland’s economy is 81.3 percent free.”
Most of this tax evasion, is sadly, quite legal. But ordinary citizens around the world who think that Microsoft and Mick Jagger should pay taxes, can take heart from the fact that some members of the global elite have been punished -- take the recent conviction of media mogul Conrad Black of Hollinger International. In July, Canadian and U.S. press reported on the lawsuits, corporate and civil, that are following his conviction for obstruction of justice and mail fraud, seeking remuneration from assets, including purported millions stashed in the Caribbean:
…"Not satisfied with receiving $20 to $40 million a year in excessive management fees, Black and the Ravelston insiders then directed significant portions of those fees to Moffat Management and Black-Amiel Management, which were empty shell companies registered in Barbados," a special report from Hollinger’s board stated.
"Even though these entities did nothing to earn fees, and did not have either employees or real operations, paying management fees to them on the pretense that they performed services allowed the recipients the prospect of transforming a portion of the enormous management fees that would otherwise most likely have been taxable in Canada (where the payments were received), or possibly the U.S. (where services were largely performed), into dividends received in Barbados (where nothing occurred)," the report stated.
NOTE: For more good examples of what tax journalist Lucy Komisar calls the “corporate bag of tricks called profit laundering,” check out the Tax Justice Network, and the Komisar Scoop -- who just revealed where did Rupert Murdoch get $5 billion to buy up the Wall St. Journal? (Answer: A collection of 800 offshore companies that helped him cut corporate taxes to 6%!)
Iraq Wounded Fight for Insurance Coverage
Posted by David Phinney on July 12th, 2006
CBS Evening News and ABC Nightline are both working stories about wounded civilian contractors fighting for insurance coverage from their employers.
It's a very rich story. The Pentagon's privatizing of military support services may or may not save money, but it certainly does privatize the human toll of war.
Civilians are coming home by the thousands with injuries sustained in Iraq. Whenever the Pentagon and the news media report US casualties -- the 500 dead (or more) working under US contractors are ignored.
The story is also a nightmare for many civilians serving in Iraq. A good number of them went to Iraq because they were making good money -- and, as the president told them, "major combat is over."
Thousands are suffering from battle fatigue -- once known as soldier's heart and now even more widely known as post-traumatic stress disorder (PTSD).
Veterans struggled with the Pentagon and Department of Veterans Affairs for years to get the acknowledgement and support for the debilitating condition. PTSD is one reason for the huge homeless problem among Vietnam vets.
Now civilian contractors are fighting the same battle -- not to mention the struggle to get coverage and disability benefits for physical injury.
(The first story to tackle the issue of civilians fighting for their insurance payments, Adding Insult to Injury, appeared under my byline. Just one of many stories framed by me that set the tone for major news organizations to follow. Anytime you guys want to send a check or share some credit, please do.)
My understanding is that both CBS and ABC are relying heavily on two fabulously strong sources for their insurance angles: Jan Crowder and Houston attorney Gary Pitts.
Jana runs several Web sites to help support contractors working in Iraq and their families, most notably Contractors in Iraq. Gary Pitts represents dozens of clients suing companies for their coverage. Jana, me and CorpWatch regularly refer potential clients to him.
While ABC and CBS will undoubtedly focus on KBR truck drivers (some riveting amateur video of insurgent attacks shot by truckers is available -- and in the hands of CBS), there are plenty of other companies in the same pickle, including Titan, which provides translators to the Army in Iraq. The San Diego Union ran an excellent series on the issue.
Mine Tragedy Spun as Profit Opportunity
Posted by CorpWatch on January 11th, 2006
Spectacular. Bad-boy investment celebrity Jim Cramer, host of CNBC's "Mad Money with Jim Cramer," actually recommended today investing in "mine-safety" stocks. Not because it is important for us as a country to pick up the slack left by a "paper tiger" federal mine safety agency, but because there could be lots of dough in it.
According to the blog Crooks and Liars, Cramer actually said ""we're not partisan here... we're just looking to make money, and the Bush Administration has been negligent." And why on earth not cash in?
There is simply something obscene about the very suggestion.