Investigating the central role played by major accountancy firms in tax avoidance


The article 'The role of accountancy firms in tax avoidance: Some evidence and issues' was published on accounting forum journal volume 29 issue 3 in September 2005. There are two authors who wrote this article: Prem Sikka, a Professor of accounting at University of Essex, and Mark P. Hampton, a senior lecturer in economic at University of Kent. The article discusses the central role played by major accountancy firms in international tax avoidance. As part of creative accounting, tax avoidance is not illegal but it places the credibility of the accounting profession at risk and it could easily fall down to illegal (tax evasion).

Article Review

The article mainly argues that in pursuit of private profits, accountancy firms have diversified from their traditional trade of selling auditing and other accounting services into a highly lucrative business of selling aggressive tax avoidance schemes to multinational corporations and wealthy individuals. It provides some evidence of the strategies and tactics deployed by accountancy firms to sell such schemes that lead their customers to avoid corporate, sales and payroll taxes. The article point out that the unprecedented scale of selling tax avoidance schemes, especially by the 'Big Four' accountancy firms, has resulted in a fundamental shift tax burdens from mobile capital and well-off individuals to less mobile capital and less well-off citizens, which could causes some social consequences like threatening the legitimacy of the state, attacking the basis of the state's whole existence and challenging the future of liberal democracy.


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According the view of the authors, the neo-liberal economic theories facilitate globalisation that capital roams the world looking for high profit, low tax and minimal social obligations jurisdictions. This trend may produce great economic benefit and may also produce extreme poverty and huge inequalities in the distribution of social wealth. The dismantling of exchange controls and trade barriers has encouraged the development of a rapacious tax avoidance industry. Accountancy firms act as a major role in the tax avoidance industry. The article provides some evidence to show how accountancy firms devise, implement and mass market their tax avoidance schemes to corporation and wealthy individuals. Ideally accountancy firms distinguish their expert labour from competitors by appealing to claims of professionalism and ethical codes, but they are capitalist organisations too whose success is measured by growth in fees and profits. Since making profits by "bending the rules" is a prominent feature of enterprise culture, accountancy firms' "emphasis is very firmly on being commercial and on performing a service for the customer rather that on being public spirited on behalf of either the public or the state" (Hanlon, 1994, p.150).

Accountancy firms has involved in tax avoidance industry for a long period, as the chairman of Coopers & Lybrand (now part of PricewaterhouseCoopers) put it, "there is an industry developing, and we are part of it, in standards avoidance" (Sikka & Willmott, 1995). Major accountancy firms have built networks and organisational presence in every major country and city paralleling the expansion of multinational corporations. The network allows the firms to meet local capital demands with global solutions, and enables the firms generate huge global income. The major source of revenue is selling tax avoidance schemes (Mitchell et al., 2002).

The authors also provides other evidence to point out the variety of tax avoidance schemes created by accountancy firm and the strategies and tactics used by the firms to sell. The article uses Enron and WorldCom scandals to show how deep major accountancy firms have involved through designing some highly complex tax avoidance schemes to enable the companies to avoid corporate taxes. Especially put KPMG as an example. "Although KPMG denies being a tax shelter promoter, the evidence establishes that KPMG has devoted substantial resources to, and obtained significant fees from, developing, marketing, and implementing potentially abusive and illegal tax shelters that U.S. taxpayers might otherwise have been unable, unlikely or unwilling to employ, costing the Treasure billions of dollars in lost tax revenues" (US Senate Permanent Subcommittee on Investigations, 2003, p.25). "KPMG used aggressive marketing tactics to sell its generic tax products by turning tax professional into tax product salespersons, pressuring its tax professionals to meet revenue targets, using telemarketing to find clients, developing an internal tax sale force, using confidential client tax data to find clients, targeting its own audit clients for sale pitched, and using tax opinion letters and insurance policies as marketing tools" (US Senate Permanent Subcommittee on Investigations, 2005, p.6). Moreover, The KPMG tax professional calculated the penalties for noncompliance compared to potential fees from selling one of their 500 active tax products OPIS: "based upon our analysis of the applicable penalty sections, we conclude that the penalties would be no greater than $14,000 per $100,000 in KPMG fees. …For example, our average [OPIS] would result in KPMG fees of $360,000 with a maximum penalty exposure of only $31,000." Such ideologies encourage accountancy firms to rapacious sell tax avoidance schemes without constrain any code of ethics, claims of social responsibility, professional discipline or self-regulation. Furthermore, the article provides some other evidence to reveal the strategies used by KPMG in selling VAT avoidance schemes and the tactics used by other major accountancy firms like Ernst & Young and PricewaterhouseCoopers in selling payroll taxes avoidance schemes both based on the case in UK. Through those publicly available evidence quoted in the article, the authors summarise that: For the purpose of increase profits, major accountancy firms mobilise individualist discourses and encourage their clients to report higher earning with disregard the social consequences. They have created elaborate corporate structures, and marketing techniques to sell tax avoidance schemes. The highly commercialised tax avoidance industry deprives the vital revenues for social investment and which could cause many human beings are unable to secure the basic essentials of healthcare, education, transport, clean water and other public goods. Through tax avoidance, accountancy firms bring them into direct conflict with the state and civil society and challenge the future of democracy.

Conclusion and Implication

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In conclusion, this article provides qualitative evidence about the involvement of accountancy firms in developing and selling tax avoidance schemes. Such evidence could help in understanding the trajectories in the expansion of entrepreneurial accountancy firms, conflicting with their expressed claims of ethical conduct and social responsibility. The article especially emphasises that the major role played by accountancy firms in tax avoidance industry directly erodes the social investment to create all kinds of social problems. Effective laws, regulations and enforcement are the only way to check the firms. However, effective regulations are unlikely because accountancy firms use their financial might to colonise policymaking through lobbying, the façade of professional regulation, funding for political parties. Moreover, repeated fines and warnings from regulators did not curb the tax avoidance activities by accountancy firms. The regulators suspended or restricted the operations of some firm, but even that seems to have little effect as accountancy firms seems to be keen to pursue higher profits and earnings at almost any cost. "Perhaps, this is an inevitable feature of capitalism distinguished by oligopolies where individual firms and corporations are so big that it produces a certain kind of arrogance and makes the senior people believe that they are somehow beyond the reach of the law, regulators and public opinion" (Sikka, 2008).

The article focus on tax avoidance industry which provides a window for studying some of the major issues raising the world today and broadens fresh perspectives on the role of accounting, accountants, auditors, trajectories of entrepreneurial culture, corporate social responsibility, ethics, limits of regulation, futures of the state, democracy and much more.