‘Special purpose’ approach by accountants hides corporate secrets

by Michael West | Nov 27, 2015 | Finance & Tax, Government

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

Michael West established Michael West Media in 2016 to focus on journalism of high public interest, particularly the rising power of corporations over democracy. West was formerly a journalist and editor with Fairfax newspapers, a columnist for News Corp and even, once, a stockbroker.

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