Prem is back. Guess what - via accounting's to blame.

Accounting practices have played a key role in the banking crisis, but the accountability of the accounting industry has been organised off the UK political agenda

Accounting practices had very little to do with the banking crisis. Note this isn't the same as saying that every single last accounting treatment in every company was perfect.

This was a classic, old-school banking crisis:

• Banks made loans to people who couldn't repay them.
• This meant the banks got into trouble.
• Er...
• That's it.

Sloppy regulation allowed them to get away with it for longer. But it was fair value accounting that finally brought the banks back into reality. That Prem blames accounting for the crisis says rather more about him and his own prejudices than it tells us about the real world.

Filed under: Accounting, Current issues with tags banks, guardian, idiots, prem sikka
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Other than his unerring ability to suspend facts while delivering his truly unexceptional blog entries. This time, Ritchie crows:

What’s exceptional about E & Y’s performance. They:

- alloweed window dressing

- put fornm over substance

- ignore the true and fair over-ride

- box ticked to confirm compliance with an accounting framework they helped create and which is itself misleading

That’s what auditors do. There’s nothing exceptional about this. The only odd thing is no one has appreciated it - bar the likes of Prem Sikka, Dennis Howlett, Francine McKenna and me.

I wonder if Dennis Howlett and Francine McKenna are entirely happy being lumped in with Tweedledum and Tweedledumber. I doubt it; Francine's article on Lehmans is pretty good, as you'd expect. Not for her the dribbling conspiracy theories beloved of our old friends Sikka and Murphy.

A measured observer, looking at what auditors do, would conclude that they do an excellent job. That a handful of audits end in failure among the many millions undertaken in recent years is evidence of high overall audit quality, not that the audit process is subverted and rotten.

Ritchie hasn't done an audit in years and I doubt he's ever done an ISA audit. He is simply ignorant of what auditors do in accordance with either ISAs or PCAOB standards. We know this for sure, because he muddled the two up in his previous article, as I pointed out before.

On the accounting standards side, far from SFAS No. 140 being "created" by the (then) Big 5, Michael Crooch (an Andersen partner) abstained in the vote to endorse it. There wasn't an E&Y partner on the FASB at the time.

"True and fair override" is a UK GAAP concept that has no direct equivalent in IFRS or US GAAP. However, there are protections in both IFRS and US GAAP against the form over substance problem. As the examiner's report makes clear, US directors are not permitted to prepare financial statements that are misleading. And it's the directors who prepare financial statements, not the auditors.

As for his first two statements, I think we'll just have to wait and see. The examiner's report said that there were "colorable claims" against E&Y. He didn't sign their death sentence, even if that's what Ritchie would have liked.

Filed under: Auditing, Current issues, Other blogs with tags audit quality, ernst and young, fail, fasb, idiots, lehman, prem sikka, richard murphy
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The Guardian reveals:

Prem Sikka, a professor of accounting at Essex University and a leading critic of the accounting profession, warned that without deep-rooted reform the crisis could repeat itself. "The report into the collapse of Lehmans is indicative of a deeper malaise," he said

A single case of bad auditing does not reveal anything about the state of auditing globally. You'd have to undertake a much wider study of audits to be able to deduce anything like that.

What Sikka is doing is hand-picking the cases he wants and ignoring the many millions of high quality audits that take place year in, year out. It's selection bias of the worst sort.

And it's far from obvious that his 'solution' - state-directed auditing would be any better.

Filed under: Auditing, Current issues with tags fail, guardian, idiots, lehman, prem sikka, selection bias
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Prem Sikka can't resist having a dig at Lord Ashcroft's revelation that he is non-domiciled for tax purposes over at Comment is Free.

Lord Ashcroft's statement sets out the March 2000 undertakings he gave to William Hague MP, the then leader of the Conservative party, that he would "take up permanent residence in the UK again" by the end of that year. Now, some ten years later, he says that this meant as "a long-term resident"

HMRC recognises only three types of residency - 'resident', 'ordinarily resident' and 'domiciled'. The media might interpret 'permanent residence' as domicile, but that's not really what domicile is. It's basically where you intend to die. If you're born in the UK and have never lived anywhere else, then you're not going to be able to argue that you're domiciled anywhere other than the UK. If, however, you've lived a fair amount of your life elsewhere, have extensive business interests and property in another country and, say, have a burial plot there, then you can claim domicile there.

If not ordinarily resident in the UK or not domiciled in the UK, then you can use the remittance basis to tax your non UK-sourced income. This means it's only taxed when you bring it into the UK, not when it's earned. People who can't use the remittance basis must pay UK tax on their worldwide income.

Residence and domicile are totally different concepts. It's incredible that a professor of accounting at a UK university could get them muddled up.

Filed under: Current issues, Politics, Taxation with tags domicile, guardian, idiots, lord ashcroft, prem sikka
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Prem Sikka has a new working paper out, co-authored with Hugh Willmott. Entitled The Dark Side of Transfer Pricing: It’s Role in Tax Avoidance and Wealth Retentiveness (the apostrophe is Sikka's, not mine), it is full of the usual scary stuff about how bad companies are and how they use transfer pricing to rip us all off.

The article doesn't appear to have been peer-reviewed. In fact, it's such a shoddy piece of work, I doubt whether it would be publishable in any reputable journal.

On page 18, he refers to a paper by Pak and Zdanowicz (executive summary available here), who

provide some instructive examples. Plastic buckets from the Czech Republic have been priced at $972.98 each, fence posts from Canada at $1,853.50 each, a kilo of toilet paper from China for $4,121.81, a litre of apple juice from Israel for $2,052, a ballpoint pen from Trinidad for $8,500, and a pair of tweezers from Japan at $4,896 each. Examples of export prices include a toilet (with bowl and tank) to Hong Kong for $1.75, prefabricated buildings to Trinidad at $1.20 each, bulldozers to Venezuela at $387.83 each, and missile and rocket launchers to Israel for just $52.03 each. For the year 2001 alone, such practices may have deprived the US government of US$53.1 billion of tax revenues

Pak/Zdanowicz is snappy sensationalist stuff, but it's flawed. Let's think about, say, that toilet paper from China. I don't need to defend the price. The flipside of expensive toilet paper means lots of profits in China, which will be taxed in China. Aren't tax advocates supposed to support higher taxes in developing economies? Similarly, products that are exported too cheaply will also lead to higher profits in other countries.

Also, higher import costs means higher import tariffs, which means more money received by US Customs. This is a good thing, right?

Thirdly, Pak/Zdanowicz assume that all avoided taxes would have been taxable. It's a somewhat reasonable assumption, but they still need to do more to prove it.

The upshot of all that is that the purported net cost to the US of $53.1 bn is pretty shaky, and also is offset by a net gain in other poorer parts of the world.

The rest of the paper is taken up with Sikka's usual litany of naughty companies. If you already believe that companies are bad, you'll probably be persuaded. But there's little proof here, just a lot of circumstantial evidence. The very fact that organisations like GlaxoSmithkline and Microsoft have been fined heavy amounts by nation states rather disproves Sikka's earlier line (p.9) that companies are too powerful for our own good. It's a popular line of reasoning, but it's wrong - countries are infinitely more powerful than companies.

Filed under: Academic research, Taxation with tags hugh willmott, idiots, john zdanowicz, prem sikka, simon pak, tax avoidance, transfer pricing
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While Ragging on Ritchie is an enjoyable pastime in itself, accountants can also enjoy the insane wibblings of Richard's close rival for the title of the profession's biggest idiot: Essex University professor and certified accountant Prem Sikka.

Prem is fantastic comedy value. He has a single unified thesis of the world, and he delights in spreading the message at every opportunity. I caught a panel session of his at an academic conference last year, and he ranted for a good half-hour about how the corporate world is bad, auditors are bent and banks are evil. Now, the Guardian seems to have resumed his weekly column at Comment is Free.

This week, the portion of the thesis he has decided to air is the bit about corporate power. He complains that Kraft was terribly terribly mean to its workers (by continuing to close a factory Cadbury was already closing). Then he complains that Barclays was terribly terribly kind to its workers. He thinks that everything would be much better if only the workers controlled everything.

There are a load of comments already on the article. Do look out for the comment by accounting legend, Bob Jensen. He asks where the money will come from if we destroy capital markets and whether Prem's preferred model of governance has ever worked anywhere in the history of the world.

Bob's personal website is a positive cornucopia of accounting knowledge, and you could waste days going through it all. Superb stuff.

Filed under: Corporate governance, Other blogs with tags barclays, bob jensen, cadbury, essex university, guardian, idiots, kraft, prem sikka, richard murphy
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