Meet the Big 2 Accounting Firms That Help U.S. Companies Stash Billions in Taxable Income Overseas
The Big Four global accounting firms stood by deaf, dumb, and blind during the financial crisis while their clients were nationalized, involuntarily acquired or forced into bankruptcy. Their leaders were never called to account in the United States and have so far survived and thrived in spite of the efforts of some private litigation. Better late than never, however, at least two of them — PricewaterhouseCoopers (PwC) and Ernst & Young (EY) — have been called to testify in the US and all of them scrutinized in the UK for their role in tax avoidance and alleged tax evasion by multinationals like HP, Microsoft, Google, Apple, and Starbucks.
Shifting corporate profits to lower tax jurisdictions and parking cash and earnings abroad to dodge taxes as long as possible are no new things. Some, like Richard J. Murphy of the Tax Justice Network in the UK, have been highlighting for years the way multinationals and legal and accounting enablers cheat taxpayers out of revenues that could be used for public goods like infrastructure, health care and social welfare. Initiatives like country-by-country reporting that will force more accountability for where goods are produced and where revenues are really earned are finally on the horizon.
On Monday the US Treasury announced it was taking action to eliminate “certain techniques inverted companies currently use to access the overseas earnings of foreign subsidiaries of the U.S. company that inverts without paying U.S. tax.” The Notice is effective for deals closing September 22 or later.
Just this past weekend the OECD also announced a package of recommendations that, if implemented, would put the brakes on the more frequently used profit-shifting techniques.
The US is much bigger than the UK, with enough lobbyists to dilute any tax justice movement and rabid partisan politics that turn any discussion of tax policy rancorous. US politicians seem to always, in the end, prioritize pleasing corporations by providing a “competitive tax environment for business” over tax justice and a fair spread of the burden for social welfare costs and deficit reduction. Their belief is that lowering corporate taxes translates into jobs and economic growth.
It’s just not happening.
So it was refreshing to see septuagenarian Senator Carl Levin, a Michigan Democrat who sadly won’t be back for another term after this November’s election, call both EY and PwC to testify about tax advice they gave to HP and Caterpillar, respectively. EY was never called to testify over its role in the failure of Lehman Brothers. PwC never had to answer publicly for the nationalizations of audit clients AIG and Freddie Mac and TARP bailout billions sent to banking audit clients Goldman Sachs, Bank of America and JP Morgan.
Both EY and PwC embarrassed themselves with disingenuous responses to Senator Levin’s questions. There are obvious auditor independence conflicts for both firms who continue to serve dual roles as HP’s and Caterpillar’s “independent” audit firms as well as tax avoidance strategy advisors. An auditor is supposed to be independent and objective, but advisory services, and especially lobbying, compromises that independence. This is not new since Enron and the Sarbanes-Oxley law. SEC v. Arthur Young, a decision in 1984, states, “[i]f investors were to view the auditor as an advocate for the corporate client, the value of the audit function itself might well be lost.” The SEC recently sanctioned EY for being a paid lobbyist for two audit clients.
These firms are being paid millions by shareholders to audit their own work, issuing audit opinions on the same sophisticated tax avoidance strategies they’ve advocated for, proposed, designed and implemented at these companies.
The latest tax-related cause célèbre to tag the global audit firms as scheme enablers is tax inversion. These are the M&A deals that allow US companies to move their tax home to a lower-tax country, like Ireland or England, by buying another company there. It’s as easy as that to access overseas cash and earnings at a much lower tax rate.
When a company is shifting profits offshore or planning a tax inversion to avoid US taxes on earnings held outside the US, it’s a pretty good bet either PwC or EY is getting paid to put the scheme in place.
Two lists — one published this month by the Financial Times of some likely tax inversion candidates and another put together last March by Bloomberg of the US multinationals with the most untaxed cash and earnings parked overseas — highlight how EY and PwC are the ones serving almost all of the companies with the most cash parked overseas and the most motivation to become inversionists. EY and PwC are auditing, advising, lobbying or doing all three for the companies cheating US taxpayers the most out of tax revenue.
I took the overseas parked cash list and added the three FT inversion candidates with “at least $21bn in ‘trapped’ offshore cash that the deals could unlock.” I added a column for each company’s auditor and its tax advisor and/or tax lobbyist. (All lobbying information comes from the U.S. House and Senate disclosure databases.)
If PwC is the auditor — as it is with many pharmaceutical firms that have these challenges — PwC sends independence to the wind and often acts as tax avoidance advisor, too. When Ernst & Young audits the company — EY has a major audit market share amongst technology companies — PwC usually does the tax advising. (HP is a glaring exception.)
When Deloitte or KPMG audits one of these overseas cash stashers, it’s almost always PwC or EY, or both, setting up the tax avoidance strategy and lobbying legislators for tax loopholes on the company’s behalf.
EY and PwC, and not their rivals Deloitte and KPMG, have very active Washington DC tax policy lobbying arms that count almost all of the companies on these lists as advocacy clients. (That’s why there are always fewer than four eligible auditors for the largest companies. In the UK, new reform rules require auditor rotation and many are preparing tenders now in preparation for the transition. A bank like Barclays, audited by PwC, would have to terminate its contract with EY as its well-paid lobbyist to consider the firm for the auditor job. )
Treasury’s actions this week will chill the tax inversion deals for a while, until the accountants, and the lawyers, come up with new loopholes or sell legislators on creating new ones. There’s a lot of money for everyone involved, except the taxpayers, if they don’t give up too easy.
(1) “Pfizer is still open to a potential tax-saving acquisition in Europe four months after admitting defeat in its £69.4bn pursuit of the UK’s AstraZeneca.” The Financial Times, September 11, 2014.
(2) Apple was the subject of another Senator Carl Levin hearing on its tax avoidance strategies but did not reveal which accounting firm advised it. Apple is infamous for figuring out how to create legal entities that are not taxed by any country.
(3) “In that game, multinational companies find ways to legally avoid income taxes in the countries where most of their customers are. Google cuts billions off its tax bill each year by sending profits through Ireland to a mailbox in Bermuda; Facebook (FB) sends them through Ireland to Grand Cayman; LinkedIn uses Ireland en route to the Isle of Man. O’Rourke advised each company on its arrangements, according to two people familiar with the matter.” Bloomberg, October 2013.
(4) Plans to invert/merge with Covidien, auditor is Deloitte. Covidien’s tax lobbyist is EY in the House and Senate for years 2009 to the present. PwC also lobbied for Covidien in 2008.
(5) $4.9 paid to EY for tax compared to only an $8.1 million audit fee in 2013. From the most recent proxy: “Audit related fees include accounting consultations and audits in connection with proposed acquisitions and divestitures, audits of certain employee benefit plans’ financial statements, and, in 2012, audits and audit related services in connection with the separation of AbbVie from Abbott, including associated filings with the Securities and Exchange Commission. Tax fees consist principally of professional services for tax compliance and tax planning and advice. In 2013, tax fees also include expatriate tax return services provided by Ernst & Young.”
(6) Auditor changed from PwC in 2004 after 33 years because of auditor independence issues. CFO.com June, 2004. “In its most recent fiscal year, the company shelled out more than $2.3 million in fees to PwC, including about $960,000 for mostly tax-related services. …pension fund Calpers withheld its votes for four nominees to the company’s board because they were members of the audit committee that authorized PwC to perform nonaudit services.” Also, a 5-year contract with Satyam, the Indian company audited by PwC that failed because of a $1 billion dollar fraud, was signed in 2007.
