Does the name Enron conjure up some “fond” memories of corporate scandals? “The Enron scandal, revealed in October 2001, eventually led to the bankruptcy of the Enron Corporation, an American energy company based in Houston, Texas, and the de facto dissolution of Arthur Andersen, which was one of the five largest audit and accountancy partnerships in the world. In addition to being the largest bankruptcy reorganization in American history at that time, Enron was cited as the biggest audit failure.” – Wikipedia. Wikipedia – Enron Scandal
Enron was formed in 1985 by Kenneth Lay after merging Houston Natural Gas and InterNorth. Several years later, when Jeffrey Skilling was hired, he developed a staff of executives that, by the use of accounting loopholes, special purpose entities, and poor financial reporting, were able to hide billions of dollars in debt from failed deals and projects. Chief Financial Officer Andrew Fastow and other executives not only misled Enron’s board of directors and audit committee on high-risk accounting practices, but also pressured Andersen to ignore the issues.
Enron shareholders filed a $40 billion lawsuit after the company’s stock price, which achieved a high of US$90.75 per share in mid-2000, plummeted to less than $1 by the end of November 2001. The U.S. Securities and Exchange Commission (SEC) began an investigation, and rival Houston competitor Dynegy offered to purchase the company at a very low price. The deal failed, and on December 2, 2001, Enron filed for bankruptcy under Chapter 11 of the United States Bankruptcy Code. Enron’s $63.4 billion in assets made it the largest corporate bankruptcy in U.S. history until WorldCom‘s bankruptcy the next year.
The quantum of money involved in the Enron scandal was historic at the time of the event. By today’s standards, that amount of money would be considered a paltry sum when viewed against the backdrop of trillions of funded and unfunded liabilities by indebted governments, not counting derivatives.
Enron did not fail because business was bad. It failed because of failed and/or manipulation of audits. It failed because there was wilful suppression of truthful financial disclosures. Some would have argued that it is for accountants and auditors to be “creative” in their business as long as there a resemblance of legality and conformance to rules and laws. Their job, in part is to minimise costs to their clients especially in the form of taxes. The caveat is that it must be done “legally”. Hence many of the biggest corporations pay little or no taxes at all, all done legally.
Another high-profile company is being out into the spotlight in its tax dealings. The Sydney Herald has this report on BHP Billiton:
BHP Billiton has for the first time given the public a detailed look at billions of dollars worth of deals it has with “related parties” in low-tax or no-tax jurisdictions such as Singapore and Guernsey.
The information was revealed in responses lodged by BHP to questions that were taken on notice during the Senate inquiry into corporate tax avoidance in April.
The company pays no Australian tax on the 42 per cent of its profit that is channelled through so-called “marketing hubs” in low-taxing jurisdictions such as Singapore, a strategy allowed under current global tax rules.
At the Senate inquiry’s Melbourne hearing last month, BHP, along with rivals Rio Tinto and Glencore, faced intense questioning and revealed that it was being audited by the Australian Taxation office over the activities of its Singapore marketing hub.
BHP is unlike Enron. It is probably doing everything in accordance with the jurisdictions of tax havens where they are incorporated. There are always laws. At the same time, there are always ways to circumvent laws. Creative accountants are paid handsomely for their skilful insights into the intricacies in the web of financial regulations. Try this simple question: “What is 1+1?” To a naive simpleton, the answer is obvious. The creative accountant would have whispered in your ears, “How much do you want it to be?”
And he said unto them, Render therefore unto Caesar the things whichbe Caesar’s, and unto God the things which be God’s.