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On 31 January 2013, Margaret Hodge, chairman of the UK House of Commons public accounts committee, told specialists from PwC, Deloitte, Ernst & Young and KPMG that their skills ought to be directed to nobler ends than minimising tax bills for big business. She said, “What really depresses me is you could contribute so much to society and the public good and you all choose to focus on working in an area which reduces the available resources for us to build schools, hospitals, infrastructure,” she said.
Critically evaluate the above statement and explain whether the sale of tax avoidance services enhances or devalues the accountants’ claims of professionalism.
Accounting is a service activity which plays a fundamental role in society, as not only does it provide the public with useful information regarding business entities, it also contributes to the public good, by operationalizing national tax systems. (Kothari, J. and Barone, E., 2006) According to Kothari and Barone (2006), accounting may have originated in 3600 B.
C., when mankind started engaging in increasingly complex commerce which required merchants to keep track of their financial transactions and inventory. With the advent of globalisation, which has increased countries’ interconnectedness and vulnerability to both domestic and international crises, supranational and local accounting authorities have had to start co-operating more closely with national governments in order to set stricter standards aimed at preventing accountants from engaging in unethical practices and illicit activities.
Even though recent studies (Maher, M. W. et al., 2011) have revealed that both managerial and financing accounting are subject to a wide range of ethical issues, Fitch (2007) pointed out that taxation is probably the most complicated area of accounting, mainly due to its dynamic nature and ethical implications, as numerous accountants tend to use their deep knowledge of tax regulation to help their clients minimise or avoid their tax obligations.
As a profession, accountancy is subject to various theories which clearly illustrate the duties, responsibilities, obligations and required characteristics of its practitioners. Although accountants should follow a strict code of ethics and serve the public interest, the past few decades have seen numerous scandals and frauds which have raised questions about the impact of tax avoidance schemes on accountants’ claims of professionalism.
As Margaret Hodge, chairman of the UK House of Commons public accounts committee, pointed out, KPMG, Ernst & Young, Deloitte Touche Tohmatsu Limited (hereafter Deloitte) and PriceWaterhouseCoopers’ (hereafter PwC) tax avoidance schemes clearly indicate that an increasing number of large accounting firms see tax avoidance as an excellent way to make profit. (Armitstead, L., 2013) In order to determine whether the aforementioned schemes devalue or enhance the accounting profession, the present essay will be divided into three main sections. The first section will illustrate relevant theories related to accountants’ claims of professionalism, analysing their role in society and their relationship with the state from different perspectives. The second section will support the aforementioned theories with evidence and practical examples of large accounting firms and the impact of their tax-avoiding schemes on their own employees and society. The third section will briefly summarise the main points addressed in the previous sections, drawing relevant conclusions and stating whether the sale of tax avoidance services enhances or devalues the accounting profession and accountants’ claims of professionalism.
The accusatory words used by Margaret Hodge to criticise PwC, Deloitte, Ernst & Young and KPMG’s illicit activities should be analysed in light of various phenomena which have contributed to the evolution of the accounting profession. First of all, it should be noted that numerous politicians, including Britain’s Prime Minister David Cameron, have attacked “clever” accountants who use their knowledge of tax accounting to help their clients take advantage of national tax systems’ temporary weaknesses, thus damaging honest tax payers. (Bowers, S., 2013) As valid as the aforementioned criticisms may be, different viewpoints should be taken into consideration in order to evaluate the impact of tax avoidance schemes on accountants’ claims of professionalism. For instance, it appears that numerous accountants believe that their actions are made possible and partly necessary by current circumstances. In this regard, Dixon, tax head at Ernst & Young’s British and Irish divisions, argued that today’s tax codes are completely obsolete, as they were established years ago, when globalisation and other international phenomena had not yet affected trade. (Bowers, S., 2013)
Judging from the most recent accounting scandals, it could be inferred that the accounting profession has been significantly affected by Karl Marx’s theories, which clearly state that taxation should be seen as a means of exploitation and as one of the main causes of class struggle. (Marx, K. and Engels, F., 2009)
As Moore (2006) observed, Marx believed that taxation is a tool which is used by the ruling class to convert agricultural societies into capitalist ones, as well as to accelerate industrial development. Even though Marx never supported taxes, he started seeing them as a heavy burden during his study of Russian “kulaks”, a category of farmers, whose condition had already been carefully analysed by Flerovsky (1989). Flerovsky’s (1989) observations were supported and shared by both Marx and Engels, who also came to the conclusion that capitalists were using heavy taxation to force the peasantry to resort to them in order to be able to pay their taxes. (Moore, B. J., 2006) In view of these considerations, it can be inferred that Marxist fiscal theories may be the reason why accountants and their clients have started to see taxes as a burden and a cost that should be reduced or avoided.
However, it should be noted that accountancy firms are both a product and a very important part of capitalist societies, as they serve the interests of capital through their services, which means that their activities are incompatible with Marxist theories. Moreover, as Lord Haskell pointed out whilst debating against the UK tax avoidance industry, accountancy firms that offer tax avoidance services often help their clients to register their businesses in tax havens, without renouncing the benefits offered by the government. (Hansard, 2011) As far as accountants’ role in society is concerned, Larson (1979) observed that the industrial revolution and the rise of industrial capitalism have led to the emergence of new, modern professions, which are partly similar to traditional professions. In fact, similarly to traditional professions, today’s professions are still characterised by training, professional association, autonomy and knowledge and are often associated with the state, intended as the ruling class. (Larson, M. S., 1979)
According to Weber (1968) and his followers, professions play a very important role in society, as their purpose is to solve different social categories’ problems and to coordinate their competing interests. Although this definition is still valid and applicable to modern professions, it should be noted that Weber also argued that professionals’ social closure results from their ability to access scarce knowledge, which can then be converted into marketable services. (Macdonald, K. M., 1985)
In this regard, Larson (1979) pointed out that modern professions are characterised by an inherent and natural tendency towards monopoly and that professionals’ knowledge is seen as a commodity whose value is determined by its ability to satisfy specific needs. Analysing the cases of PwC, Deloitte, Ernst & Young and KPMG in light of Weber and Larson’s arguments, it can be inferred that Hodge’s accusatory words stemmed from the fact that the aforementioned accountancy firms had turned their knowledge of taxation into a commodity, which they used to increase their profits and those of their clients, at the expense of both the government and tax payers. Considering that accountancy is a profession which is characterised by specific requirements, purposes and standards, tax avoidance schemes’ popularity raises questions about accountants’ claims of professionalism. (Tooma, R. A., 2008)
However, in order to determine where the sale of tax avoidance schemes enhances or devalues accountants’ professionalism, the concept of “profession” and its relation with ethics should be analysed first. “Profession” derives from the Latin verb “profiteor” (infinitive: profiteri), whose main meaning is “to declare, to profess, to state openly”. As Malatesta (2002) pointed out, even though this term was widely used by the Romans to refer to both intellectual and manual work, it was usually associated with noble trades which involved theoretical knowledge and prolonged training. The meaning of the term “profession” evolved between 1000 and 1200 A.D., when people started associating it with medieval universities, most of which were affiliated with the Catholic Church, hence its religious and ethical tone. (Sokolowski, R., 2006) Although modern professions are mainly based on secular knowledge, it could be argued that they have maintained several religious and spiritual aspects, as they are all linked to codes of ethics and conduct which place great importance on responsible behaviour, respect, honesty, dedication and devotion to public good, clients’ needs and the public interest. (Sokolowski, R., 2006; Durkheim, E., 2013)
Even though there are numerous national authorities which can set their own membership requirements and apply their own codes of conduct, the standards set by the International Federation of Accountants (IFAC) represent an excellent source of information, as they have already been introduced in over 100 countries worldwide and are in the process of being implemented in many others. (Allen, C. and Bunting, R., 2008)
Objectivity, integrity, honesty, autonomy, confidentiality and independence are among the main ethical standards promoted by the International Federation of Accountants (IFAC), which also states that accountants should satisfy their clients’ needs whilst acting in the public interest; moreover, accountants are required to pay particular attention to the aforementioned principles when dealing with public companies given their vast range of stakeholders that may be affected by their operations. Allen, C. and Bunting, R., 2008; IFAC, 2005)
As an IFAC member, the United Kingdom has already implemented the aforementioned ethical standards, which explains why Margaret Hodge’s speech focussed mainly on PwC, Deloitte, Ernst & Young and KPMG’s lack of consideration for the public good, subtracting fundamental resources which could be used to provide tax payers with more schools, hospitals, infrastructure and so forth. Therefore, it can be inferred that the sale of tax avoidance services is not only a crime, but also a clear violation of the code of conduct all registered accountants should comply with. (IFAC, n.d.)
As Kothari and Barone (2006) observed, tax avoidance services are also incompatible with one of the fundamental definitions provided by the American Accounting Association, which describes accounting as the process of recording, measuring and interpreting information in such a way to enable all stakeholders to make informed decisions. In light of this definition, it is evident that an accountancy firm which uses its professionals’ knowledge of taxation to reduce its clients’ taxable income will automatically distort their financial information, thus providing stakeholders with inaccurate data. In light of the definitions, theories and perspectives analysed so far, it is evident that most of them clearly indicate that all professions, including accountancy, have specific social responsibilities and should aim to serve the public interest. As a result of that, it could be argued that when a professional offers services that may have a negative impact on society and the public good, their actions can be considered to be incompatible with their claims of professionalism.
Margaret Hodge’s accusatory words are certainly in line with the above statement, as not only did she accuse PwC, Deloitte, Ernst & Young and KPMG of helping large companies to avoid paying their legal and fair share of tax, she also argued that accountancy firms that offer tax avoidance schemes should not be allowed to work for the government, as their illicit services have a negative impact on society and the public good. (Armistead, L., 2013)
In this regard, Sikka and Hampton (2005) argued that accountancy firms that operate like entrepreneurial businesses, selling tax avoidance schemes to large companies and wealthy individuals, impose a greater burden on less wealthy citizens and contribute to eroding the entire tax system. In order to gain a better understanding of the impact that the sale of tax avoidance schemes has on society, Sikka and Hampton (2005) suggest that accountancy firms should realise that there are more than four billion people in the world who have to live on less than $30 a month and that poverty is a problem that affects western societies as well, as recent studies show that almost 4 million British children live in poverty, while 16% of British citizens live below the poverty line. Obviously, by subtracting resources from the state, accountancy firms that sell tax avoidance schemes make it more difficult for the state to help those in need of financial support, which is why tax avoidance is regarded as a form of white-collar crime, which is committed by professionals whose actions have a negative impact on a wide range of stakeholders, including their competitors.
As McGee (2012) observed, tax evasion and avoidance are two very common phenomena which have been analysed by numerous experts and thinkers who have attempted to determine whether the state deserves a percentage of workers and businesses’ earnings. Obviously, accountants play a fundamental role in this debate, as they are the ones who can help both individuals and business entities to pay less taxes. It could be argued that because the state imposes too high taxes, those accountants who offer tax avoidance schemes are more concerned about the public good than those who don’t, which would make the former more “professional” than the latter. However, recent research shows that tax avoidance schemes are usually designed specifically for large companies and wealthy individuals by accountancy firms whose main goal is to increase their profits and those of their clients. (Great Britain: National Audit Office, 2012)
According to Haynes et al. (2012) the best way to evaluate the impact illicit activities on a certain profession and society is to analyse specific cases. As far as accountancy is concerned, Haynes et al. (2012) focus on Ernst & Young, one of the largest accountancy firms, whose code of conduct has been recently decoupled by its illicit practices, including the sale of tax avoidance schemes. First of all, it should be noted that Ernst & Young has been criticised and accused on several occasions for its financial manoeuvres and fraudulent activities; an example of this is when New York prosecutors accused it of being aware of Lehman Brothers’ engagement in repo 105, a practice thanks to which a business can reduce its liabilities and leverage to make a good impression on its stakeholders, by classifying short-term loans as sales. (Carty, D., 2010) With regards to Ernst & Young’s tax avoidance services, Haynes et al. (2012) reported that the accountancy firm devised a scheme thanks to which the directors of a large UK company, Phones 4U, paid themselves in fine wine and other expensive items just to reduce their national insurance payments and avoid income tax. However, even after the UK government outlawed the aforementioned tax avoidance scheme in 1997, Ernst & Young developed a new one which enabled large companies’ directors and employees to keep avoiding paying national insurance contributions and income taxes by setting up an offshore trust. (Great Britain: Board of Inland Revenue, 2005)
As Sikka (2012) pointed out, Ernst & Young also helped Debenhams and many other large high street retailers that accepted payments by credit and debit cards to reduce their taxable income and avoid VAT by devising a new, creative scheme known as “Project Pita”. Debenhams started using the said scheme in 2000 and, in 2001, a tax tribunal outlawed it as its only purpose was to help the company to avoid taxes. (Staples, R., 2003) With regards to the impact of Ernst & Young’s tax avoidance scheme on the UK tax authorities, the Treasury estimated that it would have subtracted at least £300 million each year from the state. (Brodie, S., 2005)
In light of the aforementioned examples, it is evident that Hodge’s accusatory words stemmed from the fact the tax avoidance strategies devised by large accountancy firms like Ernst & Young have a profound impact on society, as they deprive the state of significant resources which could be used to build schools, hospitals, roads, houses, infrastructure and so forth. Noteworthy is a study conducted by HM Revenue and Customs, which revealed that as of 2010-2011, the UK tax gap was £32 billion. (BBC News, 2012) With regards to the European Union, Murphy (n.d.) reported that tax evasion and avoidance cost EU members around €1 trillion every year.
Similarly to Ernst & Young, PwC, Deloitte and KPMG have also been found to contribute greatly to helping large companies and wealthy individuals avoid taxes. As Palan et al. (2013) observed, as “The Big four”, these accountancy firms play a fundamental role in the global tax avoidance industry, which they support by devising thousands of tax avoidance schemes and using a wide range of techniques, including tax havens, subsidiaries, affiliates, charitable foundations, trusts and royalties, just to mention a few. KPMG, for example, has been found to offer 500 tax avoidance schemes, which the company’s employees had been trained to sell to multiple clients. Moreover, the investigations conducted by the United States Department of Justice revealed that the company was aware that thanks to its tax shelters, its clients had avoided around $2.5 billion in taxes. (Haynes, K. et al., 2012) Surprisingly, even though KPMG LLP, KPMG’s U.S. member firm, was found guilty and admitted its criminal activities, the government agreed to let it pay a fine of $456 million. (Johnson, C., 2007) According to Haynes et al. (2012), it is evident that the reason why KPMG devised those tax avoidance schemes and is still involved in the tax avoidance and evasion industry is that the profits generated by its illicit activities greatly exceed the costs it would have to incur if it were found guilty of helping its clients to avoid taxes.
However, it should be noted that courts’ approach to aggressive tax avoidance and evasion is changing, mainly due to their criminal nature and negative impact on society. That is why when HM Revenue & Customs found out about a new tax avoidance scheme that was being sold by PwC, one of “The Big Four” accountancy firms, its members defined it as an artificial scheme whose only purpose was to help the firm’s clients to avoid around £11 million in taxes. (Evans, R., 2012) As a result of that, the court outlawed the said scheme. (Evans, R., 2012) However, that wasn’t the first time PwC was caught selling tax shelters to wealthy clients. For example, in 2005, many of the tax products “manufactured” by PwC, including BOSS (Bond and Options Sales Strategy) and CDS (Contingent Deferred Swap), were classified by the Internal Revenue Service as abusive and illegal. (US Congress – Senate, 2006) Although it could be argued that the said schemes were devised to help people and business preserve their earnings, rather than depriving the state of vast resources, a report released by the U.S. Senate in 2006 states that both PwC and KPMG were aware of the illicit nature of the tax avoidance schemes they were selling, as they sent opinion letters to their clients reassuring them that their products wouldn’t be outlawed if the IRS decided to investigate them. (US Congress – Senate, 2006)
Similarly to KPMG, PwC and Ernst & Young, Deloitte has also been criticised by Margaret Hodge for its tax avoidance schemes, which were devised specifically to help its clients reduce their “tax payable”, thus harming honest taxpayers and society. (Armitstead, L., 2013) With regards to the sale of tax avoidance services, David Sproul, Deloitte’s chief executive, has recently argued that the United Kingdom should not blame accountancy firms for its losses, as it is its legal system that makes tax evasion and avoidance possible. (Sky News, 2013) Analysing David Sproul’s argument from an ethical point of view, it is evident that in spite of the existence of various loopholes, this claim is incompatible with accountants’ claims of professionalism, which include honesty, integrity and devotion to the public good.
This essay attempted to determine whether the sale of tax avoidance services enhances or devalues accountants’ claims of professionalism, taking into consideration Margaret Hodge’s words, which clearly indicate that KPMG, Ernst & Young, Deloitte and PwC’s illicit activities have a negative impact on society. (Armitstead, L., 2013) First of all, various theories related to accountants’ claims of professionalism, their role in society and their relationship with the state were analysed.
According to Marx, taxation is a tool used by the ruling class to transform agricultural societies into capitalist ones and to accelerate industrial development. (Moore, B. J., 2006) Moreover, capitalists may impose heavy taxes on citizens to force them to leave their lands and start serving the capital, in order to be able to pay taxes. (Moore, B. J., 2006) In light of this, it is evident that Marx did not support taxes and his fiscal theories may be one of the reasons why numerous accountants, as well as their clients, see taxes as a cost that should be avoided. However, if the rise of the tax avoidance industry resulted from accountants’ belief that the state does not serve the public good and has no right to take a portion of citizens’ earnings, accountancy firms should renounce the benefits offered by the government and, most importantly, they should not keep all the profits generated by their tax avoidance strategies to themselves. (Hansard, 2011) That is why most of the examples described in the “Tax avoidance and accountants’ professionalism: some evidence” section indicate that both politicians and tribunals/courts are becoming increasingly intolerant to accountancy firms’ tax avoidance and evasion strategies, as they deprive governments of billions of pounds which could be invested in a wide range of initiatives, such as building schools, hospitals, roads, infrastructure and helping poor people, just to mention a few. In order to evaluate the impact of the sale of tax avoidance schemes on both society and the accounting profession, the term “professionalism” was analysed. First of all, professionalism comes from the Latin word “profiteor”, which as widely used by the Romans to refer to noble trades that involved theoretical knowledge and prolonged training. (Malatesta, M., 2002) The term “profession” evolved between 1000 and 1200 A.D. in Italy, when people started associating it with medieval universities, which were usually affiliated with the Catholic Church, hence its religious tone. (Sokolowski, R., 2006) Although its meaning has changed over the centuries, professionals still have to comply with codes of ethics and conduct, which state their duties and responsibilities to their profession, their clients and to the public.
In view of these considerations, this essay analysed the characteristics, nature and purpose of some of the tax avoidance schemes devised by Ernst & Young, KPMG, Deloitte and PwC, in order to determine whether the sale of tax avoidance services is compatible or incompatible with accountants’ claims of professionalism. Considering that objectivity, integrity, honesty, autonomy, devotion to the public good, confidentiality and independence are among the main ethical standards promoted by the International Federation of Accountants (IFAC), it can be inferred that the sale of tax avoidance services devalues accountants’ claims of professionalism, as not only does it deprive the state of resources which could be used to improve society, it also imposes a greater burden on honest taxpayers. (Allen, C. and Bunting, R., 2008; IFAC, 2005)
With regards to the sale of tax avoidance and evasion schemes, Dixon, tax head at Ernst & Young’s British and Irish divisions (Bowers, S., 2013) and David Sproul, Deloitte’s chief executive, argued that tax law should be updated as its numerous loopholes allow accountancy firms to help their clients avoid taxes. (Sky News, 2013) As questionable as this argument may be, its importance lies in the fact that The Big Four clearly see themselves as ordinary businesses, rather than associations of professionals, whose main goals are profit maximisation and client retention. However, considering that all The Big Four have been harshly criticised and even penalised for their illicit activities, through fines, imprisonment and other penalties, it could be argued that judges and politicians’ growing hostility towards tax avoidance and evasion should discourage accountants from devising new tax avoidance schemes. Unfortunately, investigations have revealed that the tax avoidance industry has not stopped growing and that The Big Four are still involved in illicit activities, mainly because the profits generated by the sale of tax avoidance services greatly exceed the costs they would have to incur if they were found guilty of helping their clients avoid taxes. Haynes et al. (2012)
In view of these observations and considerations, it can be inferred that the sale of tax avoidance services is incompatible with the ethical standards and requirements associated with professionalism and devalues the accounting profession, due to its illicit nature and negative impact on society and honest taxpayers.
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