An accounting fraud is the manipulation of financial statements in order to benefit the business financially or to create a false appearance of financial health. In the situation of Caterpillar Inc. (CAT) - a manufacturer of heavy construction and mining equipment, diesel-electric locomotives, diesel and natural gas engines, and industrial gas turbines - the payment of federal income taxes on their earnings was avoided to boost the company’s financial status, saving the company billions of dollars and keeping its stock price high. CAT, having more than 500 locations worldwide - including the Americas, Asia Pacific, Europe, Africa, and the Middle East - is vast in size and in economic standpoint, with sales and revenues of $53.9 billion in the year 2019 (Caterpillar, 2020). However, a lawsuit against Caterpillar Inc. for inadequate tax disclosure had greatly impacted the company from the time period of 2013 to 2017.
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A great portion of Caterpillar Inc.’s investigation focused on a Switzerland-based parts subsidiary, known as Caterpillar SARL (CSARL). Over the span of 13 years, the company had cut its tax bills by approximately $2.4 billion through the taxation of their profits in Switzerland, where the tax rate had not reached nearly as great as the U.S. top corporate rate of 35% (Drucker, 2017). Although the vast majority of CAT’s sales occurred in the U.S., 85% of the company’s part sales were recorded to CSARL (Grayson, 2018). The company’s scheme had been revealed when an anonymous employee, later revealed as tax-department employee Daniel Schlicksup, threatened to tip off the International Revenue Service. He accused the company for using what he referred to as the “Swiss structure” and the “Bermuda structure” through the transportation of their profits to offshore shell companies to avoid the payment of U.S. taxes, which were incomparable to the effective tax rate as low as 4% in Switzerland and Bermuda (Grayson, 2018). From February 12, 2013 to March 1, 2017, the lawsuit sought class action status and was dismissed without prejudice, which gave Societe Generale the authority to bring it again if it was thought to be necessary (Reilly, 2018). On March 2, 2017, law enforcement officials, including the IRS, raided three of the company’s Illinois-based facilities, confiscating electronic records and documents. The day following these raids, the lawsuit against Caterpillar Inc. was filed on March 3, 2017 (Stempel, 2018).
As CAT was seen to have violated the Sarbanes-Oxley Act, which protected investors by reviewing legislative audit requirements and improving the accuracy and reliability of corporate disclosures, the lawsuit was put in order (Newswires, 2018). Due to this, stakeholders - including stockbrokers, creditors, and customers - feared a loss, affecting the stock price and the corporation overall negatively. Caterpillar Inc.’s stock market value sank over $2.4 billion after the company’s facilities and headquarters in Peoria, Illinois were raided by the Department of Commerce, Federal Deposit Insurance Corp and International Revenue Service a total of three times (Drucker, 2017). Following the report by Leslie A. Robinson, an accounting professor at the Tuck School of Business, on the New York Times’ report, CAT’s shares were down by another 3%, causing the dollar value of the scandal to be approximately $2.5 billion. As a result of the case, David Schlicksup, the global tax strategy manager, accountant and whistleblower of this case, is expected to receive about 30% of what the government is able to recover (Yu, 2017). As a result of IRS audits of its 2013 to 2017 tax returns, Caterpillar Inc. faces $2.3 billion worth of back taxes and penalties (Stempel, 2018).
CAT’s lawsuit is a reflection of the government’s capability of finding businesses that manipulate their financial operations to improve their financial status. As GAAP Principles and legislations enacted to protect stakeholders are often violated, operations such as the International Revenue Service, the Department of Commerce, and the Federal Deposit Insurance Corp. are very effective to detect and inspect these issues. Caterpillar Inc.’s manipulation is just another example of the significance of auditors and a reminder to other businesses of the necessity to be honest and cooperative with the GAAP Principles and accounting legislations.
- Caterpillar. 2020, www.caterpillar.com/en/company.html. Accessed 1 Mar. 2020.
- Drucker, Jesse. "Caterpillar Is Accused in Report to Federal Investigators of Tax Fraud." The New York Times, 7 May 2017, www.nytimes.com/2017/03/07/business/caterpillar-tax-fraud.html. Accessed 27 Feb. 2020.
- Grayson, Wayne. "Cat Slapped with $2.3B Penalty by IRS for Avoiding Taxes." Equipment World, 15 Feb. 2018, www.equipmentworld.com/cat-slapped-with-2-3b-penalty-by-irs-for-avoiding-taxes/. Accessed 27 Feb. 2020.
- Newswires, Dow Jones. "Caterpillar Clashes with IRS." Fox Business, 2 Jan. 2018, www.foxbusiness.com/features/caterpillar-clashes-with-irs-wsj-2. Accessed 28 Feb. 2020.
- Reilly, Peter, J. "Lawsuit against Caterpillar for Inadequate Tax Disclosure Dismissed." Forbes, 4 Oct. 2018, www.forbes.com/sites/peterjreilly/2018/10/04/lawsuit-against-caterpillar-for-inadequate-tax-disclosure-dismissed/#42fe416b6116. Accessed 28 Feb. 2020.
- Stempel, Jonathan. "Caterpillar Wins Dismissal in U.S. of Post-raid Lawsuit Tied to Tax Probes." Reuters, 26 Sept. 2018, www.reuters.com/article/caterpillar-lawsuit/caterpillar-wins-dismissal-in-us-of-post-raid-lawsuit-tied-to-tax-probes-idUSL2N1WC24J. Accessed 1 Mar. 2020.
- Yu, Roger. "Caterpillar Shares Fall after Tax, Accounting Fraud Report." USA Today, 8 Mar. 2017, www.usatoday.com/story/money/2017/03/08/caterpillar-shares-fall-after-tax-accounting-fraud-report/98892874/. Accessed 1 Mar. 2020.
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