For a profession whose name suggests ‘honesty’ in business and literally everything else, the accounting profession, on the world scale, has besmirched its own credibility badly.
After the fall from grace of Arthur Andersen LLP, one of the former "Big Five" accounting firms among PricewaterhouseCoopers, Deloitte Touche Tohmatsu, Ernst & Young and KPMG, providing auditing, tax, and consulting services to large corporations, the remaining big players have been indicted in serious financial dishonesty that disables governments’ ability to reach their development goals.
A careful study by academics, Prem Sikka and Hugh Willmott titled, “The Tax Avoidance Industry: Accountancy Firms on the Make.” Critical Perspectives on International Business, reveals that about 21 trillion dollars has been hoarded by wealthy elites in secretive offshore jurisdictions to avoid taxes in their home countries. The offshore hoard is protected by a highly-paid, professional enablers in the private banking, legal, accounting, and investment industries.
This open access study examines the involvement of global accountancy firms in devising and selling tax avoidance schemes euphemistically marketed as normalised “tax planning”. It demonstrates how “tax planning” involves “wilful blindness” to complicity in dubious and sometimes fraudulent and corrupted activity. Prem Sikka and Hugh Willmott reveal in detail the construction and promotion of elaborate tax avoidance schemes by big accounting firms (Deloitte & Touche, Ernst & Young, KPMG) that reduce the “tax take” on business and corporations, and thereby reduces the state revenues required to provide and maintain public services.
The researchers cast doubt upon the “business culture” that has become established in these firms and question the appropriateness and adequacy of private regulation of these firms. This paper also contributes to a crucial public debate on the legal tax manipulations of powerful and privileged parties, which in turn increase economic inequality and undermine the foundations of functioning democracy.
In 2002, the firm voluntarily surrendered its licenses to practice as Certified Public Accountants in the United States after being found guilty of criminal charges relating to the firm's handling of the auditing of Enron, an energy corporation based in Texas, which had filed for bankruptcy in 2001 and later failed. The other national accounting and consulting firms bought most of the practices of Arthur Andersen.
The study admittedly relies upon secondary sources but strongly Subject to gaining adequate access to the big accounting firms, research based upon close-up investigation of “tax planning” would further illuminate such practices.
The study shows how normalised and institutionalised “tax planning” schemes have become in the big four accounting firms. It suggests that such schemes require closer scrutiny if payments of tax are to be made as intended, and thereby provide the revenues required to maintain public services such as education, health and pensions.
The study informs a debate about the payment of taxes and the role of big accounting firms in creating aggressive tax avoidance schemes. It questions the appropriateness and adequacy of private regulation of these firms and so contributes to a public debate on the tax contribution of comparatively powerful and privileged parties.
The study “blows the whistle” on the role of big accounting firms in devising schemes that reduce the “tax take” on business and thereby reduces the revenues required to provide and maintain public services. “The pursuit of wealth, prestige and the exercise of power by concocting tax avoidance schemes have consequences for others, in the form of a lack of resources for expenditure on public goods to enhance or preserve hard won social rights.”
“As key players of the construction of post-1970s neo-liberalism, the Big Four accounting firms (PricewaterhouseCoopers, Deloitte and Touche, KPMG and Ernst & Young) have been major beneficiaries of financial expansion. They are all multinational and have devised ownership structures to frustrate scrutiny of their own affairs, but play a central role in the construction and operation of regulatory arrangements for corporations and financial markets through governance arrangements, such as those relating to accounting and auditing.”
The UK tax authorities have referred to Ernst & Young as “probably the most aggressive, creative, abusive provider” of avoidance schemes and courts have ruled that a PricewaterhouseCoopers (PwC) scheme was a “circular, self-cancelling scheme designed with no purpose other than to avoid tax,” states the report.
The Big Four operate from hundreds of countries and cities, including over 80 offices in offshore tax havens (Mail on Sunday, 2011) that do not levy income/corporate taxes or require companies to file audited accounts. Around $US12bn (£7.9bn) of their global fees comes from UK operations, which includes £6.1bn from consultancy services, including sale of tax avoidance schemes (Financial Reporting Council, 2013).
The firms do not reveal the revenues generated through the sale of tax avoidance schemes, but a 2005 internal study by the UK’s tax authority, Her Majesty’s Revenue and Customs (HMRC), concluded that the Big Four accounting firms generated around £1bn in fees each year from “commercial tax planning” and “artificial avoidance schemes”.
This century is always looking at improving new super high speed technology to make life easier. On the other hand, beckoning as an emerging fierce reversal force to equally match or dominate this life enhancing super new tech, comes swift human adversaries which seem to have come to make living on earth even more difficult.
The recent discovery of a pandemic, Covid-19, which moves at a pace of unimaginable and unpredictable proportions; locking people inside homes and barring human interactions with its dreaded death threat, is currently being felt.
Member of Parliament for Kanye North, Thapelo Letsholo has cautioned Government against excessive borrowing and poorly managed debt levels.
He was speaking in Parliament on Tuesday delivering Parliament’s Finance Committee report after assessing a motion that sought to raise Government Bond program ceiling to P30 billion, a big jump from the initial P15 Billion.
Government Investment Account (GIA) which forms part of the Pula fund has been significantly drawn down to finance Botswana’s budget deficits since 2008/09 Global financial crises.
The 2009 global economic recession triggered the collapse of financial markets in the United States, sending waves of shock across world economies, eroding business sentiment, and causing financiers of trade to excise heightened caution and hold onto their cash.
The ripple effects of this economic catastrophe were mostly felt by low to middle income resource based economies, amplifying their vulnerability to external shocks. The diamond industry which forms the gist of Botswana’s economic make up collapsed to zero trade levels across the entire value chain.
The Upstream, where Botswana gathers much of its diamond revenue was adversely impacted by muted demand in the Midstream. The situation was exacerbated by zero appetite of polished goods by jewelry manufacturers and retail outlets due to lowered tail end consumer demand.
This resulted in sharp decline of Government revenue, ballooned budget deficits and suspension of some developmental projects. To finance the deficit and some prioritized national development projects, government had to dip into cash balances, foreign reserves and borrow both externally and locally.
Much of drawing was from Government Investment Account as opposed to drawing from foreign reserve component of the Pula Fund; the latter was spared as a fiscal buffer for the worst rainy days.
Consequently this resulted in significant decline in funds held in the Government Investment Account (GIA). The account serves as Government’s main savings depository and fund for national policy objectives.
However as the world emerged from the 2009 recession government revenue graph picked up to pre recession levels before going down again around 2016/17 owing to challenges in the diamond industry.
Due to a number of budget surpluses from 2012/13 financial year the Government Investment Account started expanding back to P30 billion levels before a series of budget deficits in the National Development Plan 11 pushed it back to decline a decline wave.
When the National Development Plan 11 commenced three (3) financial years ago, government announced that the first half of the NDP would run at budget deficits.
This as explained by Minister of Finance in 2017 would be occasioned by decline in diamond revenue mainly due to government forfeiting some of its dividend from Debswana to fund mine expansion projects.
Cumulatively since 2017/18 to 2019/20 financial year the budget deficit totaled to over P16 billion, of which was financed by both external and domestic borrowing and drawing down from government cash balances. Drawing down from government cash balances meant significant withdrawals from the Government Investment Account.
The Government Investment Account (GIA) was established in accordance with Section 35 of the Bank of Botswana Act Cap. 55:01. The Account represents Government’s share of the Botswana‘s foreign exchange reserves, its investment and management strategies are aligned to the Bank of Botswana’s foreign exchange reserves management and investment guidelines.
Government Investment Account, comprises of Pula denominated deposits at the Bank of Botswana and held in the Pula Fund, which is the long-term investment tranche of the foreign exchange reserves.
In June 2017 while answering a question from Bogolo Kenewendo, the then Minister of Finance & Economic Development Kenneth Mathambo told parliament that as of June 30, 2017, the total assets in the Pula Fund was P56.818 billion, of which the balance in the GIA was P30.832 billion.
Kenewendo was still a back bench specially elected Member of Parliament before ascending to cabinet post in 2018. Last week Minister of Finance & Economic Development, Dr Thapelo Matsheka, when presenting a motion to raise government local borrowing ceiling from P15 billion to P30 Billion told parliament that as of December 2019 Government Investment Account amounted to P18.3 billion.
Dr Matsheka further told parliament that prior to financial crisis of 2008/9 the account amounted to P30.5 billion (41 % of GDP) in December of 2008 while as at December 2019 it stood at P18.3 billion (only 9 % of GDP) mirroring a total decline by P11 billion in the entire 11 years.
Back in 2017 Parliament was also told that the Government Investment Account may be drawn-down or added to, in line with actuations in the Government’s expenditure and revenue outturns. “This is intended to provide the Government with appropriate funds to execute its functions and responsibilities effectively and efficiently” said Mathambo, then Minister of Finance.
Acknowledging the need to draw down from GIA no more, current Minister of Finance Dr Matsheka said “It is under this background that it would be advisable to avoid excessive draw down from this account to preserve it as a financial buffer”
He further cautioned “The danger with substantially reduced financial buffers is that when an economic shock occurs or a disaster descends upon us and adversely affects our economy it becomes very difficult for the country to manage such a shock”