‘Special purpose’ approach by accountants hides corporate secrets

The accounting profession has failed. It is a failure that comes at a cost to every man, woman and child in this country. No fewer than 20 multinational companies (see the list below) operating in Australia have mysteriously stopped providing full financial statements during the past few years; household names such as BMW, Avon, adidas, News Corporation. There has been no explanation.

KPMG, Deloitte, PwC and Ernst & Young, the elite firms that audit these multinationals, proffer no explanation. The effect, however, of opting to report “special purpose” rather than “general purpose” financial reports is basic; it entails less disclosure.

In turn, less disclosure facilitates tax avoidance. It allows global corporations to conceal transactions with their related-parties overseas.

Before Ansett collapsed in a smoking corporate ruin in 2001, the airline changed its accounting policy from general purpose to special purpose reporting. The effect was to hide things its millions of stakeholders ought to have been able to see.

Only those on the inside saw the crash coming. The insolvency of Ansett came at a heavy price; creditors were left in the cold. A Commonwealth scheme was invoked to pay out staff. Flyers were hit with a ticket-price levy. Competition with Qantas ended abruptly.

The trustworthiness of the Big Four accounting firms is a big deal. The integrity of Australian capital markets and our income tax system relies on chartered accountants in these firms maintaining standards. In return, they are handsomely rewarded for their services.

Yet, as the investigation by Fairfax Media and UNSW academic Jeffrey Knapp reveals, reporting practices are in decline.

Ansett switched reporting just before its collapse. While preaching to government on tax policy – indeed advocating a hike in the GST with their ears pinned back – the Big Four have quietly and conveniently allowed their large multinational clients to disclose much less.

Why, for instance, did Johnson & Johnson, the world’s biggest pharmaceutical company, suddenly cease to be a full reporting entity in 2010? No explanation. What of Pfizer, Sanofi, Novartis or Merck Sharpe & Dohme?

How can Bupa, the second-largest health insurer in Australia, explain it does not have any other stakeholders apart from its immediate parent when it has millions of policy-holders dependent on its services, not to mention $3 billion in assets and 11,295 employees? Are they not users” of Bupa’s financial reports?

How can Rupert Murdoch’s News Corporation, the ATO’s No. 1 “tax risk” and a company that influences the course of governments, explain that its accounts are of no interest to anyone other than its parent entities in New York?

How can Brazilian multinational JBS, the biggest meat processor in Australia, or Oracle, Unilever and Proctor & Gamble rationalise their decisions to interpret the accounting standards differently and report less?

A host of other multinationals, such as $40 billion mining behemoth Glencore and digital giants Google and eBay, already file special purpose reports, but each of these 20 companies on the list had actually been providing full reports but backflipped.

Some have even stopped doing consolidation accounting. The big pharma companies hauled before the Senate inquiry into corporate tax avoidance in July were forced to answer questions about transfer pricing with their related parties while their related-party disclosures had already been cut back, with no explanation.

No disclosure of related-party information means related-party transactions and balances are not audited.  The Australian Taxation Office is undermined because it no longer has timely access to related-party information.

Useful information the Tax Office can use in surveillance and enforcement has simply vanished. The Big Four have let their biggest clients diverge from an established accounting concept. And this list, although it may be solid evidence of declining standards, is by no means exhaustive.

“The Big Four auditors have knifed general purpose financial reports for multinationals and taken Australian accounting practice back 30 years,” says Knapp.

All of the Big Four were contacted for comment for this story. PwC and Ernst & Young responded.

“Special purpose reports are produced by approximately 15,000 Australian companies. The Australian Accounting Standards permit the preparation of such reports where a general purpose report is not required,” was the emailed response by a spokesperson.

“Many of these companies are either privately held or unlisted subsidiaries of large listed organisations where the group prepares general purpose financial statements which are publicly available.”

Having access to parent company accounts in New York, London or Sao Paulo, is cold comfort for Australian creditors and other stakeholders.

An Ernst & Young spokeswoman said the company had a responsibility to ensure clients met their financial reporting obligations.

“If they are not compliant, we report this to ASIC. One of these considerations is whether or not an entity is a reporting entity. If it is, such as in the case of a listed company, general purpose accounts must be prepared. If it is not, special purpose accounts are often appropriate for users of the accounts,” she said in a statement.

Sydney University accounting professor Bob Walker says the ests for allowing some public companies (or for that matter, some large proprietary companies) to “self-describe themselves as non-reporting entities (and hence prepare special purpose financial statements) are obviously deficient, as they enable some of the largest firms in Australia to reduce their disclosures and avoid scrutiny by stakeholders”.

There is a case, says Walker, for some smaller companies with few employees or other stakeholders to self-describe themselves as non-reporting entities and prepare special purpose financial statements.

“But there is also a case for fuller disclosure by firms with large numbers of employees, or firms that are involved in major transactions with the public sector, or firms that are the beneficiaries of government-issued licences, to be subject to a higher standard of disclosure.

British services juggernaut Serco is one of these. Serco operates immigration detention centres under a government mandate. It is the only company we have found to have reverted from special to general purpose reports, and it did so only after an exposé of its special purpose accounts in these pages.

Other multinationals such as Audi Australia hadn’t even bothered to file accounts until prompted by the press.

Companies that have switched to special purpose accounts

Company name	Auditor	Size	Year
JBS Holdco Australia Pty Ltd	KPMG	$3.6bn revenues $2.2bn assets 7721 employees	2013
Ansett Australia Ltd	KPMG	$3.1bn revenues $2.4bn assets	2000
News Australia Holdings	EY	$2.8bn revenues $7.1bn assets 8564 employees	2014
BMW Australia Ltd	KPMG	$1.7bn revenues $644m assets	2014
Unilever Australia (Holdings) Pty Ltd	KPMG	$1.6bn revenues $907m assets 1190 employees	2014
Johnson & Johnson Pty Ltd	PWC	$1.5bn revenues $990m assets	2014
Pfizer Australia Holdings Pty Ltd	KPMG	$1.2bn revenues $1bn assets 1120 employees	2014
Serco Australia Pty Ltd	Deloitte	$1.2bn revenues $700m assets 6000 employees	2013
Oracle Corporation Australia Pty Ltd	EY	$1.1bn revenues $1.4bn assets 2113 employees	2014
Fuji Xerox Australia Pty Ltd	EY	$888m revenues $700m assets 1918 employees	2015
Sanofi‐Aventis Australia Pty Ltd	EY	$879m revenues $928m assets	2013
Novartis Australia Pty Ltd	PWC	$808m revenues $455m assets 689 employees	2014
BUPA Australia Healthcare Holdings Pty Ltd	KPMG	$770m revenues $3.1bn assets 11,295 employees	2014
Merck Sharp & Dohme (Aust.) Pty Ltd	PWC	$768m revenues $642m assets	2014
Roche Products Pty Ltd	KPMG	$644m revenues $265m assets 343 employees	2014
Proctor & Gamble Australia Pty Ltd	Deloitte	$469m revenues $138m assets	2014
Robert Bosch (Australia) Pty Ltd	PWC	$382m revenues $321m assets 745 employees	2014
Adidas Australia Pty Ltd	KPMG	$234m revenues $108m assets 425 employees	2014
Avon Products Pty Ltd	PWC	$176m revenues $61m assets 465 employees	2010
Smith & Nephew Pty Ltd	EY	$85m revenues $135m assets 190 employees	2014