Monday, December 3, 2012

EU takes tax advice from Enron's auditor

Would a mafia godfather be trusted to end organised crime? Would a wife-beater be the right man to ask about how domestic violence should be punished? Would an auditor to Enron be the best source of advice on making companies pay more tax?

The answers to these questions hardly need to be spelled out. Unless they repent or display signs of remorse, wrongdoers are not usually consulted by policy-makers tasked with addressing the harm they cause. For some reason, though, an exception is made for accomplices to corporate misdeeds.

Before the end of this year, the European Commission will publish an action plan for tackling tax avoidance and evasion by large firms. As I've been trying to deepen my knowledge of taxation issues for a while, I was eager to learn who the EU executive has turned to for guidance. To my astonishment, I found out that the Commission's tax department has hired PricewaterhouseCoopers (PwC) to write a number of studies in recent times.

PwC is world's biggest auditor. Although Arthur Andersen may be the accountancy firm generally associated with Enron, PwC was also deeply implicated in that scandal a decade ago. It provided advice on off-balance sheet transactions both directly to the Houston giant and to partnerships run by Andrew Falstow, its chief finance officer. That was despite how ethical standards applying to the accountancy profession require a degree of objectivity when dealing with different clients.

As if that wasn't bad enough, PwC gave a clean bill of health to the accounts of banks and other financial service operators that engaged in highly risky activities before the global crisis. PwC was the auditor for American Insurance Group for many years, yet did not disclose a "material weakness" in AIG's accounting methods until 2008. By that time, AIG was involved in a dispute over "collateralised debt obligations" with Goldman Sachs. PwC was also the auditor for the "vampire squid", to use Rolling Stone journalist Matt Taibbi's colourful description of Goldman Sachs.


Meanwhile, PwC confessed in 2011 that it failed to detect flaws in the accounts of JP Morgan over many years. In a separate case, it agreed last year to fork out $7.5 million to settle charges by the US Securities and Exchange Commission over the deliberate inflation of revenue by India's Satyam Computer Services. Because of the scale of the misreporting, the affair has been dubbed "India's Enron".

And, of course, PwC has handled Mitt Romney's accounts since 1990. Documents unearthed during the US presidential election campaign indicated that Romney availed of legal loopholes to dramatically reduce his tax bill over a 15-year period.

In his book on tax havens Treasure Islands, Nicholas Shaxson calls major auditors like PwC "the private police force of global capitalism". The limitations of private police forces were highlighted when the Olympic Games came to London during the summer: G4S was unable to perform tasks traditionally done by the public security forces. The same can be said of PwC. Is it right to give a for-profit auditor the sole responsibility for signing off the accounts of the globe's most powerful corporations?


PwC clearly serves the interests of its masters. It helps ensure that the super-rich pay a much smaller proportion of income tax than the rest of us. PwC is active in those tax havens that EU officials profess to abhor. In Jersey, it even wrote a law designed to shield auditors from scrutiny.

On the surface, it appears absurd that the European Commission has hired PwC to provide expert analysis on such subjects as business tax reform and the links between tax avoidance and global poverty. Yet if you work from the assumption that the Commission is undertaking no more than a window-dressing exercise, things begin to make more sense.

The EU executive has indicated that the forthcoming action plan on tax avoidance is part of its work on "corporate social responsibility" (CSR). We are supposed to believe that by working in tandem with big business, the Union's governments and institutions can convince them to cough up a bit more so that future generations will have good quality schools and hospitals.

Yet CSR is about as meaningless as putting a picture of a dolphin on a tank replete with toxic chemicals. As Joel Bakan explains in his book The Corporation, the laws of most countries are clear about the role of big business. Under these laws, the overriding responsibility of corporate decision-makers is to maximise corporate gains. "The law forbids any other motivation for their actions," Bakan writes. "Corporate social responsibility is thus illegal - at least when it is genuine."

As it happens, PwC is not the only "expert" with a less than pristine record advising the Commission's tax department. Michael Devereux is one of those to have contributed to a data-heavy study on the "effective tax levels" paid by corporations, which has been prepared at the Commission's request. He is director of the Oxford University Centre of Business Taxation. The centre's website thanks a number of corporations for their "generous" financial support. Among them are Vodafone, a British telecommunications company that paid no corporate tax in Britain last year.

Depriving EU countries of an estimated 1 trillion euros per year, tax evasion and avoidance is one of Europe's most pressing problems. Turning to those who benefit from this problem for "expert" advice is one sure way of preventing a solution.

•First published by New Europe, 2-8 December 2012.

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