Audit Firm: KPMG Staff Arrested in Tax evasion Investigation

Her Majesty's Revenue and Customs-HM Revenue and Customs or HMRC is a non-ministerial department of the UK Government responsible for the collection of taxes, the payment of some forms of state support, and the administration of other regulatory regimes including the national minimum wage.

Four partners at the Belfast office of KPMG have been arrested in connection with suspected tax evasion. HMRC officials visited the global accountancy firm's city Centre office on Wednesday and detained the men. They are Jon D'Arcy, Eamonn Donaghy, Arthur O'Brien and Paul Hollway, the firm's most senior staff in Northern Ireland.

KPMG said it is cooperating with the investigation and the four men have been placed on "administrative leave". The firm added that it does not have "any indication that this investigation relates to the business of KPMG or the business of our clients". The firm added that it does not have “any indication that this investigation relates to the business of KPMG or the business of our clients”.

HMRC said: “Officers arrested four individuals from Northern Ireland [on Wednesday] in connection with suspected tax evasion. We can’t comment further.”

KPMG has been at the fore of a campaign to persuade the Treasury to grant Northern Ireland special corporation tax status. Among the other KPMG executives arrested on Wednesday was Paul Hollway who is the firm’s head of corporate finance in Ireland. Mr Donaghy is KPMG's head of tax in Belfast and has been heavily involved in the campaign to have corporation tax powers devolved to the Northern Ireland Executive. As well as their work for KPMG, the four men are directors of a property investment company called JEAP Ltd. The firm suffered heavy financial losses when the property market crashed in 2008. However, it is unclear at this stage if that forms part of the HMRC investigation.

Additional Thoughts

Tax evasion and tax avoidance are issues which require the utmost care and attention from the auditors and authorities as economy can suffer huge losses due to this. Auditors should be very careful and should look out for transactions and other matters which may indicate the possible tax evasion. Moreover while providing taxation consulting services to its corporate clients the auditors should ask for all the pertinent information from clients to avoid any chance of the possible tax evasion.

Sources:

• http://www.bbc.com/news/uk-northern-ireland-34931675
• http://www.theguardian.com/business/2015/nov/26/kpmg-partners-arrested-hmrc-tax-evasion-inquiry

Audit Firm: FIFA scandal

The Fédération Internationale de Football Association (FIFA) is an association governed by Swiss law founded in 1904 and based in Zurich. It has 209 member associations and its goal, enshrined in its Statutes, is the constant improvement of football.

KPMG was appointed as the auditor of FIFA in 1999; a year after Sepp Blatter (the ex-president of FIFA) took charge of the FIFA president office. KPMG began auditing FIFA’s accounts and they have had the contract ever since.

Recently a scandal of corruption and bribery emerged in the Football Body. The US Department of Justice has indicted a total of 14 current and former FIFA officials and associates on charges of "rampant, systemic, and deep-rooted" corruption following a major inquiry by the Federal Bureau of Investigation (FBI).The US indictment alleged that US and South American sports marketing executives paid and agreed to pay "well over $150m" in bribes and other illegal payments to obtain lucrative media and marketing rights to international football tournaments. That does not include other possible alleged corruption around the world.

According to FIFA 2014 Annual Report, all member associations and confederations have to provide FIFA with an audited financial statement every year. Additionally, FIFA arranges a central audit of 40 member associations and one confederation each year through its statutory auditors KPMG to verify that all financial assistance payments are in compliance with the FAP (Financial Assistance Programme) Regulation.

The question arise that why the auditor of FIFA, KPMG Switzerland not been able to ask pertinent questions about the corruption and bribery issues going on in the football body. After when the issue became public, a review of the audit work performed by KPMG Switzerland has begun and it is going to be conducted in consultation with KPMG International.

Additional Thoughts

Audit firms should stay skeptical about any mismanagement going on in the organization which they are auditing. If the detection of fraud doesn’t come under the purview of a statutory audit they can still ask the organization for conducting a forensic audit if they consider any allege fraud matter material enough. Management letter of weakness can be used as an effective tool for communicating with those charged with governance and advising them of any particular control weaknesses the auditors have identified during the audit, and suggestions to remedy these.

Chinese Companies Need Vigilant Audit

Some of my readers have shown their interest to the assurance services in BRIC in the comments to the last post. And guess what? The recent issue of The Economist contains the article “Accounting in China”, which reflects my concerns about audit of companies from BRIC in general (see link). The beginning of the article is quite appealing:

“CAN you trust Chinese accounts? Many investors fear (and several short-sellers are betting) that the answer is “no”. Sino-Forest, a big forestry firm listed in Toronto, is a case in point. Last year Muddy Waters, a short-seller, accused it of running a Ponzi scheme, which it denies. On January 31st Sino-Forest released the final report of independent investigators into the charge. Insiders crow that the gumshoes found no smoking gun. The gumshoes grumbled that, lacking access to all the evidence, they were “not able to reach definitive conclusions”.

America’s SEC is trying to force the Shanghai office of Deloitte Touche Tohmatsu, a big Western accountancy firm, to hand over papers related to Longtop, a Chinese software firm that was delisted by the New York Stock Exchange last year. Deloitte refuses, saying this would violate Chinese laws on “state secrets”. Deloitte may have a point. If it co-operates, its local staff could be jailed under Chinese law.”

So, this is the question, which had to be raised sooner or later: can be the companies transparent while operating in the conditions of non-transparent political system? There are no big traditions of Chinese government accountability to citizens of China. The market incentives to provide true and fair financial statements are seem to be not enough.

How to deal with this issue?

China need not take all the blame for the failure to provide true financial statements. The problem is common for all emerging markets. It could be said that the reason for that is not necessarily deliberate misrepresentation. Errors might happen due to lack of knowledge, the absence of open communication tradition.

According to the article in The Economist one of the Big4 bosses acknowledged the issue and insisted that “the Big Four have greatly increased their vigilance in China”. To generalize this comment one can state an implicit rule for the audit of financial statements in emerging markets: the financial statement risk for all companies originated from emerging markets should be assessed as "high" at the beginning of audit unless otherwise could be proven. The proof of lower risk assessment could be obtained after one or two years of audit, which would provide evidence about low susceptibility of systems to errors and effective control system.

I agree that this proposal could be viewed as a strict and reactionary one, but I stated it to initiate discussion of what could be done regarding accounts provided by BRIC and other emerging markets. I expect you to share your valuable ideas in the comments, and we might discuss them.

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