Ethical Claims of Large Accountancy Firms Smack of Hypocrisy

Editorial Note: We are delighted to publish this “opinion piece” by Dr. Prem Sikka, a frequent contributor to our social media blog. As always, when you read his contribution, we ask that you keep in mind that the opinions expressed therein are those of the author. They do not represent the position of the AAA or of any other party.

Prem Sikka is Professor of Accounting and Finance at the University of Sheffield and Emeritus Professor of Accounting at the University of Essex in UK. His research on accountancy, auditing, tax avoidance, tax havens, corruption, corporate governance, money laundering, insolvency and business affairs has been published in international scholarly journals, books, newspapers and magazines. He has appeared on domestic and international radio and television programs to comment on business matters. He has advised and given evidence to a number of UK and EU parliamentary committees. Most recently (2016-2017), he advised the UK House of Commons Work and Pensions Committee for its investigation into the collapse of BHS, one of the largest retailers, and related pension matters.
 
Prem holds the Working for Justice Award from Tax Justice Network, Accounting Exemplar Award from the American Accounting Association (AAA), Lifetime Achievement Awards from the British Accounting and Finance Association (BAFA) and PQ Magazine, Personality of the Year Award from Accountancy Age and the inaugural Abraham Briloff Award from The Accountant and International Accounting Bulletin for promoting transparency and public accountability of businesses.

All over the world there is concern about tax avoidance by large corporations and wealthy elites. The latest revelations known as the Paradise Papers add further fuel to the debate. The Paradise Papers consist of some 13.5 million pages of internal information leaked from Appleby, a law firm specializing in international tax planning. The documents are publicly available on the website of the International Consortium of Journalists.

In common with previous leaks known as the Panama Papers, Luxembourg Leaks and HSBC Leaks (see References, below), once again attention is focused on the role of the Big Four accounting firms in crafting schemes that enable wealthy elites and large corporations to avoid taxes. All too often the firms sell tax avoidance schemes to their audit clients and then report on the resulting transactions. Audited Company accounts rarely provide information about corporate tax avoidance strategies. Whether the tax avoidance schemes are legal or otherwise can only be established by test cases, and these are comparatively scarce as tax authorities frequently lack the resources to investigate and challenge the schemes.

In any case, the revelations raise questions about ethics and morality of practices that deprive elected governments of resources for alleviation of poverty and investment in social infrastructure. Faced with the ability of capital and wealthy elites and corporations to avoid taxes, citizens are left with stark choices: either pay more for a crumbling infrastructure or forego hard-won social rights. Neither is palatable or conducive to social stability.

The Big Four accounting firms routinely seek to distinguish themselves from others by appealing to ethics and social responsibility. Their websites boast of ethics. The website of PricewaterhouseCoopers (PwC) claims that the firm’s “high standards of ethical behavior, are fundamental to everything we do … We are willing to walk away from engagements and clients if our independence, integrity, objectivity, or professionalism could be called into question if we continued”. Deloitte claims that “Integrity and ethical behavior are central to maintaining our reputation”. Ernst & Young boldly states that “We reject unethical or illegal business practices in all circumstances … We are alert for personal and professional conflicts of interest”. KPMG boasts “high ethical principles”. In the light of a steady stream of revelations, the above seem to be just cynical PR statements designed to disarm critics and it is unlikely that journalists and general public attaches too much credibility to the claims.

Big accounting firms have a long history of profiting from tax avoidance. In 2003, a report by the US Senate Permanent Subcommittee on Investigations concluded that

“respected professional firms are spending substantial resources, forming alliances, and developing the internal and external infrastructure necessary to design, market, and implement hundreds of complex tax shelters, some of which are illegal … They are now big business, assigned to talented professionals at the top of their fields and able to draw upon the vast resources and reputations of the country’s largest accounting firms …”.

Here is an interesting extract from a 2013 UK House of Commons inquiry into the role of the Big four firms in tax avoidance. Just before the hearing, the chairperson of the Committee met a senior person connected with PwC and then said

“I have talked to somebody who works in PwC, and what they say is that you will approve a tax product if there is a 25% chance—a one-in-four chance—of it being upheld. That means that you are offering schemes to your clients—knowingly marketing these schemes—where you have judged there is a 75% risk of it then being deemed unlawful”.

Partners of other firms admitted to having a threshold of 50%.

The Paradise Papers once again show a huge gap between the public claims and actual practices of accounting firms. How can this be explained?

The gap persists because the internal dynamics of the firms are decoupled from external responses. Firms manage external pressures and public skepticism with claims of ethical behavior and social responsibility. Well, they can hardly do anything else. At the same time, internal processes cannot easily be aligned with such claims. Internally, staff are trained to design and sell tax avoidance schemes. Tax departments and staff are assigned revenues and profit generating targets. Those failing to meet the targets are disciplined whilst those meeting the targets are rewarded with promotions and salary increments. Over a period of time, certain habits and practices become normalized and tax avoidance becomes just another part of daily organizational life. As the internal and external dynamics remain decoupled, any claims of ethical conduct come across as hypocritical. The hypocrisy is not an accidental or unintentional outcome, but rather it is the intentional outcome of policies deliberately chosen and implemented by senior executives of the firms.

The tensions between internal and external responses are exposed by whistle blowers, court cases, media investigations and leaks such as the Paradise Papers. The negative publicity and public anger should encourage firm to align organizational culture, goals, practices and mindsets of staff with social expectations but they have shown little inclination to do so, especially as large amounts of profits are at stake. So the prospect is of further loss of legitimacy, public anger and possibilities of tougher regulatory responses.

References

HSBC Leaks

Luxembourg Leaks

Panama Papers