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Review: 'Taming the Corporations'

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21st Apr 2005
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Authors: Austin Mitchell & Prem Sikka
Publisher: Association for Accountancy & Business Affairs
Price: £8.95
ISBN 1-902384-90-1
Available from the AABA, PO Box 5874, Basildon, Essex SS16 5FR. More information (and online access to related monographs) available from the AABA website.

'Taming the Corporations' is the latest monograph in a series co-written by Essex University accountancy professor Prem Sikka and Labour MP Austin Mitchell, who have made names for themselves as critics of the accountancy establishment.

Where previous AABA pamphlets focused on issues such as "insolvent abuse" and the failings of auditors who hold the public to ransom, the latest edition tackles multinational corporations and pirates of privatisation who have profited at the public's expense.

Corporate power has serious consequences for society, argue Mitchell and Sikka. "Limited liability has been used to shield fraud and self enrichment by company executives and to exploit investors, employees, consumers, creditors, pensioners and citizens," they write.

The accountancy profession hasn't been let off the hook in their latest tirade, either. The authors point out that the Big Four firms are in the front rank of global multinationals and are implicated in "dodgy but officially sanctioned accounting practices" that have produced profit manipulation, failures and frauds with consequent losses of jobs, savings, homes and pensions.

Mitchell and Sikka are not impressed by the UK's response to the most recent wave of corporate failures in 2001/02. Where the US authorities pursued Andersen out of existence and introduced the Sarbanes-Oxley Act, UK legislators were content to introduce a few limited reforms in the Companies Act 2004 which tinkered with the existing "chaps regulating chaps" formula.

They point out that corporate power is based on the right of limited liability and that auditors hold sway through a publicly conferred monopoly - both of can also be taken away through legislation.

The formula is familiar, but what makes Sikka such a nuisance to the profession's leading lights is his vast archive of material documenting their flaws and failures. The test of 'Taming the Corporation' lies in the quality of this research and the practicality of the proposals he and Mitchell put forward.

As they acknowledge, the monograph is merely a "sketch" to illustrate what needs to be done. Rather than provide a complete run-down of their reform agenda, this reivew highlights three key issues and the solutions proposed to redress them.

  • Income inequalities: For the five years to 2003, the pay for CEOs of large UK companies increased by 168%, while the average pay rise for workers barely kept pace with inflation at 3%-4% pa.
    Solution: Two-tier board structure To break the unhealthy back-scratching that inflates executive pay awards, Mitchell and Sikka propose replacing the unitary board with two tiers, in which an elected non-executive board will oversee the executive board on behalf of stakeholders, host communities, employees and consumers. Legislation will prevent directors from earning more than 10 times the company's average wage.

  • Tax avoidance Successive UK governments have appeased corporations by shifting the tax burden to individuals, who paid £114bn in tax by 2003/04 compared to £48.8bn in 1989/90. According to the Revenue, corporation tax receipts during the same period rose from £21.5bn to £28.1bn - just 2.5% of GDP. The paper documents a number of transfer pricing ruses, including toilet paper charged at $4,121 when "exported" from a group's Chinese subsidiary. Quoting their own estimate from a previous report, Sikka and Mitchell estimate Britain loses between £25bn and £85bn a year in corporate tax avoidance and evasion.
    Solution: Crackdown on tax havens and domicle rules 'Taming the Corporations' calls for an end to the regime that allows Crown dependencies to operate as tax havens. The powers of the Financial Services Authority and other regulators should be extended to offshore dependencies, which would be forced to exchange information with other countries to elminate tax evasion. All offshore entities operated by UK companies to be registered with Revenue & Customs and any bank, law firm or account encouraging tax avoidance through artificial transactions should lose its licence to trade.

  • Audit negligence "British accounting practices have more holes than Swiss cheese," Mitchell and Sikka write, citing cases from Maxwell through to Wickes, Independent and Versailles. "Yet government indifference lets lying dogs sleep and accountancy regulators sweep things under their dust-laden carpets," they add, highlighting several cases where fines for negligent audits failed to match the losses suffered by shareholders.
    Solution: Companies Commission to take over responsibility for audit and accountancy regulation Replacing the overlapping collection of 22 accountancy regulators is hardly a new idea. IASC chairman Sir Bryan Carsberg proposed a similar commission in 2000, which influenced the more recent restructuring of the Financial Reporting Council. What is new is the suggestion that the commission take on responsibility for appointing and remunerating company auditors - with the cost met by a levy on large corporations. Revenue & Customs and the National Audit Office should be empowered to carry out company audits.

    Many of the arguments, evidence and solutions have been heard before from Sikka and Mitchell. They also tend to undermine their case with occasional lapses into emotive rhetoric. CEOs are invariably presented as fat cats more preoccupied with their pay checks and bonuses than with the health and welfare of customers, employees shareholders or citizens. Accountancy's regulatory structure, they argue at one point, allows the businesses that dominate it to "play fast and loose, launder money, operate cartel and pander to the interests who effectively run the self-regulatory club".

    In one case, the authors laughably characterise the ASB and IASB as "highly secretive" corporate-dominated organisations. Tell that to anybody who has sat through the IASB's epic open meetings, or sifted its comprehensive discussion and consultation papers. This hectoring tone tends to suggest that 'Taming the Corporation' is advancing a politically motivated agenda.

    But do not let stylistic and occasional factual quirks fool you. This is a serious work that merits attention. In many cases, the reforms Mitchell and Sikka propose have been under review within Whitehall. Several suggestions have been borrowed the US Sarbanes-Oxley Act and may ultimately appear in Europe's equivalent.

    In spite of their anti-capitalist rhetoric, Mitchell and Sikka do not espouse Marxist revolution. For all the fear and loathing they generate among the great and good, they argue for classic liberal reforms. 'Taming the Corporations' concludes by citing Adam Smith's dictum that capitalism needs to be fair and ethical to be successful. To achieve this end, the authors call for "a new social settlement which is neither corporate chaos nor state control, but which allows companies and stakeholders to work in partnership for the benefit of each".

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