Big four accounting firms accused of secrecy over tax haven staffing

The Australian 2:30pm July 5, 2017

Michael Roddan

The big four accounting firms — Deloitte, KPMG, PricewaterhouseCoopers and EY — fail to accurately report all the jurisdictions in which they operate and have staff numbers greatly over-represented in tax havens, according to a new research report by Tax Justice Network founder Richard Murphy.

The report, funded by left-wing minor parliamentary groups in the European Parliament in the wake of the Luxembourg Leaks and the Panama Paper revelations, found serious deficiencies in the legal structures adopted by the four major global accounting firms which left them “almost wholly opaque” to outsiders.

The Luxembourg Leaks dealt with more than 28,000 pages of documents detailing favourable tax arrangements offered by the nation’s government to some of the world’s biggest companies, which were leaked by former workers for PwC. The Panama Papers revealed links between a number of international leaders and offshore shell companies that were used to hide or launder wealth.

Although the accounting firms were not explicitly involved with many of the revelations, a greater level of scrutiny has fallen on the companies and their consultancy work on tax minimisation for multinationals.

The accounting firms, which had combined sales revenue of €120 billion in 2016, operate in 186 jurisdictions. But the report said the legal structure adopted by the firms on one level suggested globally integrated companies and on another implied they were made up of numerous separate legal entities not under common ownership but bound by contractual agreements. This, Mr Murphy said, was adopted to reduce the regulatory cost and risk of operating in certain jurisdictions, ring-fence larger companies from risks faced by certain offices, and to protect clients from regulations.

A case study on the legal structure of KPMG, which is headquartered in Switzerland, could not identify the legal ownership of its offices in 55 jurisdictions. Mr Murphy said none of the accounting firms accurately publish lists of where their offices and personnel are located, while Deloitte and KPMG both appear to make mistakes in their own transparency reports.

As a result, Mr Murphy could only pinpoint where 91 per cent of the accounting firm’s workforces were located. He said 10 per cent of the firms’ workforces were located in “secrecy jurisdictions”, otherwise known as tax havens.

In the case of KPMG, Mr Murphy said he found no evidence of an office in Gabon, in Africa, where it says it operates. The KPMG Antigua and Barbuda office was mentioned in the company’s international annual review but not on the KPMG international locations listing. This was the reverse for KPMG’s Syria office. In the case of KPMG Azerbaijan the local operation was managed by a firm located in Guernsey, the self-governing island in the English Channel. Similar issues were found with Deloitte, Mr Murphy said.

“We suggest that in an era where transparency is seen as fundamental to accountability it is inappropriate for the world’s leading auditors to be almost wholly opaque on their operations and to provide no effective reporting on their own activities when they play a fundamental role in the regulation of global capitalism,” Mr Murphy and his co-author Saila Naomi Stausholm said.

The report also found staff are over-represented in tax havens, or “secrecy jurisdictions”. The accounting firms have more staff in Luxembourg in proportion to the size of the local population than in any other country; the Cayman Islands come second in this ranking and Bermuda third. Bonaire, Guernsey, Jersey, the Isle of Man, Gibraltar and the British Virgin Islands also had a large network of staff, which Mr Murphy said implied “disproportionately more activity” was being undertaken by the firms in secrecy jurisdictions.

On average, the number of staff employed in an office in a tax haven was almost double that for an office in a non-secrecy jurisdiction small state.

“These firms are, then, quasi-regulators at the heart of the global financial system and yet we know remarkably little about them,” the report said. “This presents a clear paradox: the accountability of global capitalism is dependent upon firms that enjoy significant opacity about their own operations.”

“The big four are key to the operation of global capitalism but fail that responsibility.”