John Kavanagh in pugnacious form
April 13, 2008
I see John Kavanagh is in pugnacious form over the Tesco/Guardian libel match:
It seems that we have reached a stage where the rhetoric of journalists, fuelled by their constant pursuit of scandal and inspired by the tendentious writings of self-appointed experts like Richard Murphy, Prem Sikka and their like, has been so successful in persuading the public that tax avoidance is immoral and unethical that merely to state that someone is a tax avoider is seen as libellous if untrue.
The fact of the matter is that Richard is an expert in his field - he doesn’t need to be self appointed. Check the organizations that support and sponsor his research. Strike 1. If John read what Richard and others say, he would find it isn’t about avoidance per se but the use of what Tesco already admits is a highly complex structure that has allowed it to provisionally avoid (at the very least) stamp duty. Ostensibly, that goes against HMRC’s general position of substance over form in the creation of tax planning arrangements. Strike 2. John goes on to say:
I rather like Tesco’s approach to this case. If the Guardian argues successfully that their article is not defamatory, then Tesco loses their case but regains the moral high ground. If the article is defamatory if untrue, the Guardian will have to show that it got its facts right in order to win, and only Tesco can know whether they have.
John has got this the wrong way around. Anyone remember the MacDonald’s case? As Alex Hawkes correctly points out:
Richard Northedge has a similar view: that Tesco could be entering into a MacLibel situation.
This battle has the appearance of a Goliath versus David fight – and remember who won that. Tesco should look at the MacLibel case: after years of dispute, the hamburger giant won but it was the protestors that gained the sympathy and McDonalds is still regarded as a representative of big bad business.
Alex then goes on to argue that justice is blind and therefore the courts will not take the moral/ethical issue into consideration. I’d prefer that it does because if you think about the basis for common law, it is built on an unwritten but well understood code of ethics. Even if the courts rules in Tesco’s favour (assuming it ever gets that far), then Tesco is in a no-win position.
If, as I suspect, Tesco is forced to reveal what it has done, then the MacLibel issue takes on greater poignancy.
I see a growing concern for issues that have an ethical flavour and which go to the heart of issues around sustainability, risk, compliance and social responsibility. It seems to me that you can hardly fly the flag of supporting issues around say Fair Trade while at the same time engaging in tax avoidance on the scale that Tesco already admits. That makes you a hypocrite. Strike 3.
Endnote: You wouldn’t expect John to agree with the position taken by Alex Hawkes, Richard Murphy, Prem Sikka and myself. His bio says: “I am Director of Private Clients in the London office of Shaws, Chartered Tax Advisers. I advise on all aspects of tax affecting private clients, with an emphasis on non-domiciliaries and offshore strategies.”
Off blance sheet reporting irretrievably broken
April 10, 2008
Rules regarding how banks account for off-balance sheet interests are “irretrievably broken”, a senior group of international rulemakers has warned…Accounting standard setters are already under pressure for their support of marking assets to current market prices – a practice that has resulted in billions in writedowns and affected banks’ profitability seriously.
To make matters worse, FASB and the IASB are saying:
“Completing a final standard by mid-2011 will be extremely difficult, perhaps impossible”
and that attempts to fix the problem:
…has lost momentum because of staff turnover and “relative inexperience.” It also urgently recommends that some senior figure be put in charge of the project, warning: “We cannot afford the luxury of waiting for the newly assigned staff to get up to speed.”
Marc Andreesson, he of Netscape and Ning fame ysas:
Remember Enron?
Imagine Enron times a hundred.
Marc is not wrong. We’re looking at potential losses on a colossal scale, running trillions of USD. Last month, the FT reported that:
Accounting rulemakers have defended the use of “fair value” accounting against attacks from bankers and insurers, who claim that applying it to financial instruments in the current turmoil risks undermining the financial system.
Fair value forces companies to mark assets and some liabilities to their market value, leading top banks and insurers to take heavy writedowns as markets seize up and values plummet…
“Fair value seems to be the only measure that is appropriate for all types of financial instrument,” the IASB says in its paper. But it acknowledges that “there are issues and concerns that have to be addressed before the boards can require general fair value measurement”.
Current rules allow a mix of fair value and old style “historical cost” accounting, where assets are booked at the price at which they were bought. But the explosion in the use of derivatives and other complex structured products has meant that increasing amounts of assets are reported at fair value.
Critics have said that because of current market dislocations companies’ profits have been dented by unrealised paper losses. Last week American International Group, the insurance company, said it had proposed to regulators that fair value should be suspended while the credit crunch was worked out…
“We are determined to simplify and improve IAS39 [the current standard] by creating a principle-based standard,” said Sir David Tweedie, chairman of the IASB.
The row over fair value is pitting executives against many investors and the accounting profession. Most alternative suggestions involve heavier reliance on subjective management estimates, which investors dislike.
As you can see, the banking world wants it all ways up and is resisting efforts to sort out a mess of its own making.
I don’t know how many times or over how many years I’ve written about this issue but I find the excuses given by FASB/IASB breathtaking. The problem of valuing what are in essence gambling chips is not going away any time soon.
Auditors should not have to deal with this problem. Right now they are expected to act as quasi actuaries for ‘assets’ that are notoriously difficult to value under a set of guidelines that represent a quagmire of legalese and which were written in favour of the financial institutions.
The simple solution is one the banks cannot stomach: All financial instruments should be the subject of actuarial assessment upon which auditors can rely as independently valued. Any actuary worth his salt will recognize the attendant legal risks of being over generous and therefore value at zero unless they have clear evidence that all counter party risks have been extinguished.
What we have now are the banks on one side strong arming the audit crews while the auditors are being forced to rely on an unworkable standard but falling back on ‘prudence’ as its get of jail free card. I can’t blame them.
If the IASB gets this right then the impact on the derivatives market will be significant. My guess is that it will pretty much kill off the practice of creating ever more exotic instruments. The banks won’t be happy but at least we might return to a bank lending system based on assets that have genuine value. That has to be the better way.
What I do not accept is that three more years are required to deal with the problem. The more time it takes, the more likely the banks are to obfuscate, prevaricate and obstruct attempts to resolve the issue.
In the meantime, ordinary people are suffering as banks take fright and clamp down on lending. If you’re advising clients on new business propositions, now is the time to be teaching them about cash flow management. They’re going to need it.
Tesco takes on The Guardian - oh good
April 7, 2008
Alex Hawkes is reporting that Tesco is suing The Guardian over its allegations that Tesco has bilked the UK taxpayer of around £1 billion through the use of offshore tax arrangements. Alex seems perturbed wondering:
If, like me, you write about corporate tax avoidance day in, day out, it’s a bit of a wake-up call, but not an unexpected one. I have been thinking for the last eighteen months that it was only a matter of time before someone sued for libel over tax avoidance claims.
I’m delighted. Assuming Tesco chooses to pursue this course of action in court then it will have to defend its position by showing its tax computations in open court, explaining the rationale for its actions and demonstrating exactly how The Guardian has libelled. It is fairly safe to assume it will do everything in its power to avoid that course of action.
Last month, Richard Murphy gave a detailed description of a meeting he had with Tim Voak, Tesco’s tax director and Emma Reynolds, head of government affairs. In Richard’s words:
The only reason no tax is not due is not accident or chance. It is because an “immensely complicated” structure has been put in place to ensure that tax has not been paid, quite contrary to the spirit underlying UK corporation tax rules laid down by parliament and using an offshore structure to achieve that objective. In the circumstances I am quite categoric: the choice of that structure constituted a tax avoidance exercise which achieved its objective in that no tax was paid when the contrary would be expected by an informed person, like me. In addition Tescos ensured that the structure that they used was not tax compliant in that it moved the centre of taxation of UK property out of the UK and out of the UK tax net. This I also consider to be tax avoidance by it, from which it must have expected to benefit (and no doubt did through the low rental yields it paid on these properties according to its annual accounts for 2007). As such this exercise was also an action in tax saving for which Tescos was entirely responsible capable of being added, in my opinion into the tax loss calculation the Guardian might have used since Tescos (and no one else) created that loss.
Richard’s opinion is that The Guardian has done nothing wrong. Apart from a sensationalist headline, I’m inclined to agree. We will wait and see if that is tested. I believe it should be tested and that pursuing a libel action is a very good way to examine the issues. People like Richard, Alex and to a lesser extent myself have been drawing attention to the way large companies try to find ever more ingenious ways to walk around tax law, to what we see as the detriment to civil society. One can argue that is Tesco’s right to avoid especially given the complexities inherent in the UK tax system. That does not make it acceptable, especially when it involves complexities that can only have one purpose - the avoidance of tax.
The real test then becomes whether Tesco has a duty to operate as tax efficiently as possible. This is at the heart of what anti-avoidance is all about. The intersection between social responsibility and the exercise of corporate duties under the law. It will be an interesting debate.
Is the time right for wholesale change in audit?
March 31, 2008
Prem Sikka’s argument that:
…the very model of company audits is flawed. It permits company directors to hire and remunerate auditors, albeit with shareholders rubber-stamping their decisions. Under the model, profit-seeking auditing firms are expected to regulate capitalist enterprises. As no one can make a profit without appeasing or accommodating clients, auditors can never be independent of the client companies or their directors.
is logically correct but will not lead to change any time soon unless there is a wholesale re-writing of the rule book under which auditors are appointed, remunerated and operate.
Prem’s argument is not new but perhaps he thinks the time is right to canvass for change? He believes the way the Audit Commission operates works better but does it? How often have we seen the Auditor General be critical of no less than HMRC and yet little changes.
Changes in the way auditors are appointed and remunerated only works if it leads to a higher quality standards. Yet as we already know from Francine McKenna, the problem is as much to do with audit firms’ technical ability to understand, parse and report upon complexity in an increasingly complex business environment. Simply changing the paymaster is not enough.
