Andy: What’s the Point of the Big Four Accounting Firms?

The blame for the debacle surrounding the best picture award at the Oscars ceremony – La La Land was wrongly announced as the winner, instead of Moonlight – has been laid at the feet of the accountancy firm PricewaterhouseCoopers (PwC), which  “audited” the votes, but whose representatives managed to hand announcer Warren Beatty the wrong envelope.

The satirical magazine Private Eye has a cartoon in which a bemused PwC executive tells colleagues: “I don’t understand the opprobrium! After all, furnishing our clients with misleading results for public consumption is what we excel at.”

Private Eye backs up the joke with a list of questionable activities PwC has been involved in, including: facilitating large-scale tax avoidance by corporations, and then prosecuting whistleblowers who tried to expose it; and signing off on what proved to be inaccurate accounts by institutions like the British bank Northern Rock and the supermarket chain Tesco.

PwC is one of the so-called Big Four audit firms – the others are EY (formerly Ernst and Young), KPMG and Deloitte – that have been accused of acting as a “de facto oligopoly” in a recent report for the Transnational Institute (TNI).

The TNI report, The Bailout Business: Who Profits from Bank Rescues in the EU?, makes two key points. First, the Big Four audited most of the banks that crashed during the crisis and failed to spot any problems in advance. Of 150 EU banks that were rescued by governments, none was flagged by the audit firms as being in trouble.

Sanctions for this dismal performance have been minimal: Deloitte was fined €12 million for malpractice in its audit of Spanish Bankia, while EY was fined €10 million in the US for wrongdoing in its audit of Lehman Brothers.

The second main point made by TNI is that the Big Four, along with other financial services companies, then helped to design the state rescue packages for those same banks, again with often less than stellar results.

To bring the issue closer to home, EY audited Anglo Irish Bank for ten years before it went belly-up, and earned €10.3 million of fees in the process. Anglo’s successor – the Irish Bank Resolution Corporation (IBRC) – sued EY for failing to detect improper loan transactions during this period.

Although a judge in 2016 said “it seems incomprehensible how these accounts were signed”, EY has escaped punishment. Indeed, remarkably, the Irish government retained EY to audit the IBRC real-estate portfolio, which earned the firm a further €22 million in fees between 2013 and 2014.

Another of the Big Four, KPMG, was paid a massive €76 million to help liquidate IBRC. PwC, along with US bankers Merrill Lynch and law firm Arthur Cox, had earlier advised the Irish government on the overall, and ultimately catastrophic, bank bailout programme.

The disjunction between the profits earned by well-networked financial firms, including the Big Four, and the real value (if any) generated for Irish society, is also highlighted in a new report for Oxfam Ireland: Mantras and Myths: a True Picture of the Corporate Tax System in Ireland.

One of the most startling features of the report is Ireland’s role in the aircraft-leasing business. A whopping 40 percent of all leased aircraft in the world are leased through Ireland, and yet most of those aircraft may never enter Irish airspace.

The reason they make use of Ireland is, in a word, tax. The Irish state does not levy withholding tax on lease rental payments and offers lucrative exemptions from tax on dividend and interest payments, as well as imposing no tax at all on the transfer of aircraft parts or of the aircraft themselves.

The companies also benefit from generous depreciation allowances and they can use Section 110 Special Purpose Vehicles (SPVs; the Central Bank estimates that there are 300 such aircraft leasing SPVs in Ireland) to further minimise tax liabilities.

The upshot is that, in 2014, the whole aircraft leasing business, despite managing in excess of €100 billion in assets, paid corporate tax of just €23 million. And it employed only 1,200 people, including those providing tax and other financial services.

Oxfam reports that, while the aircraft leasing business appeared to have expanded dramatically in 2016, “this may have benefited some large accounting firms [but] it has not led to any new jobs”.

The debate in Ireland around corporation tax usually revolves around whether Ireland is receiving less money than it should (from Apple, for example).

But there is a broader question to be asked about whether the support network facilitating tax avoidance makes any positive net contribution to Irish society at all, or whether its advisory and financial engineering services actually do more harm than good.