Naomi Fowler ■ #ParadisePapers and the Big Four: in the words of a former insider


We’re sharing in full an article by tax ethicist George Rozvany who racked up 32 years of experience at senior levels of Big 4 accounting firms and major corporations. We interviewed him previously on the Taxcast along with the award winning economics and finance journalist Michael West speaking on the Australian experience of the Big Four. Firstly I asked him for a comment on the Paradise Papers:

The Paradise Papers represent what has now become a familiar milestone in the world of international tax avoidance. This world was founded by shadowy figures cloaked in the dark money of crime gangs invited in by the glitterati of rocky outcrop islands made vulnerable with the collapse of colonialism. Bereft of the financial support of formerly vast empires, these nations became the willing whores of the international crime gangs drafting taxation laws with the assistance of unethical accountants and lawyers at absurdly low taxation rates to preserve impossibly large fortunes built from the suffering of humanity. The decades rolled on and the crime gangs were joined by the international accounting firms of today serving the unethical end of the corporate market. These organisations have become so powerful that they can persuade the lead nations of the world to be “tax competitive,” lowering corporate tax rates levels against all economic sense and social responsibility to deny necessary support to the most disadvantaged in society. The Paradise Papers are important because they disclose the truth in all its ugliness. Only the blind cannot see and it is hoped the this this does not extend to the Lawmakers of the world well capable of putting to an end the social nightmare of the international tax avoidance industry.”

Now for his recent article, which was originally posted on Michael West’s excellent site here:


The liberty of a democracy is not safe if the people tolerate the growth of private power to a point where it becomes stronger than the democratic state itself

President Franklin Delano Roosevelt

Although just nine years since the last Global Financial Crisis, it would seem that world has a suppressed what it means to be on the edge of economic cataclysm. A new generation of predominantly anaemic elected representatives in the guise of “lawmakers” cavort on their electoral success in our halls of power and indeed the leadership apex of most of the Western economies. Short political lifetimes and even shorter political terms together with the style of the new generation of political aspirants of everyone “being different” to captivate social media and the all important “patronage” of the “rich folk” has largely resulted in politicians incapable of independently identifying current risk areas for a potential global financial crisis, let alone either independently or dependently developing prevention strategies or total solutions for such an event. If you don’t believe me, just ask your elected representative what the “top four” risks are for a GFC and what are his and her broad plans for addressing them.

Even those who remain from those treacherous times, few apart from perhaps German leader Angela Merkel can claim both leadership and a meaningful contribution to their nation’s handling of the GFC. So consign to oblivion President Trump for a moment and consider the political emergence in 2020 of a more alluring and unquestionably more female conscious President Kim Kardashian.  To whet the line of questioning on the GFC risk issue (and you will now know why from your first attempt), you may wish to suggest that the top 4 risks may well be the self proclaimed “Guardians of International Commerce”, the “Big 4” international accounting firms Deloitte, Ernst & Young, KPMG and PWC whose names adorn as symbols of economic efficacy the skylines of every major commercial hub in the world. This article probes this question and may well give the reader some indicators as to why this may not be as absurd as the guffawing Partners in the Big 4 accounting firms will have you believe.

When it comes to global financial crises, let us assume that Mark Twain was correct in saying

”History doesn’t repeat itself, but it does rhyme.

So it is unlikely that a global financial crisis will occur on quite the same terms as in 2008 with a cancerous growth of purported AAA rated financial instruments, but it will occur and certainly in a way that is complex beyond belief, riddled with “how could this possibly occur” causes and outcomes, a global stampede of both rational and irrational investors to investment assets of relative safety such as gold and totally unprepared Governments around the world desperately seeking a way out.   History has many examples of unusual causes for major financial crashes including “tulip mania” in early 16th century Holland where the pre-crash value of a single Viceroy tulip bulb reached some 10-14 times the annual income of a skilled craftsman or some US$600,000 in today’s dollars before a catastrophic decline in February 1637 to the more sober 2017 prices some 380 years later.

So where would a newly elected President Kardashian seek such advice from? There is little doubt that each of the “Big 4” accounting firms is well capable of producing a substantial report for the White House on potential risk areas, potential actions to mitigate such a risk and so forth. In my humble opinion, however, it is extremely unlikely that the respective tribal cultures of each of the “Big 4” accounting firms of being “the best” would allow an open admission of the potential collapse of one or all of their own as a trigger for a GFC despite the implosion of accounting behemoth Arthur Andersen & Co in 2002 and the near collapse of one of the current Big 4, KPMG, in 2007 as a result of fraudulent tax shelters.

I digress slightly to explain briefly the world of risk which has only emerged as a discipline in relatively recent times. Typically, guided by a Chief Risk Officer, it is a Board of Directors duty to its shareholders to identify key risks to the organization, a policy in relation to each key risk perhaps including an acceptable risk tolerance, a set of procedures to deal with such risks, a set of of controls to ensure that the risk is appropriately dealt with and testing of those controls to ensure that the controls themselves are effective in ensuring that the risk is appropriately dealt with.

The risk function has emerged strongly from “the pack” for the simple reason that calling a risk wrong could easily result in a multi-billion law suit for a Board of Directors not just in relation to tax risk but in relation to other risks to the organization such as environmental risk of which the industrial catastrophe of Bhopal in India in 1984 is a prime example with over 500,000 people being exposed to methyl isocyanate and other toxic chemicals. However, tax risk arguably looms as the largest of all risks due to the continuing seductive appeal of international tax avoidance to generate large financial gains for an organization through persuasive selling techniques and the use of tax structures which have little impact on its day to day running. For example, while no doubt initially perceived as a clever tax planning gain by Apple through the use of an Irish structure, the subsequent US$14 Billion “unexpected” tax bill from the European Union on competition grounds was not only foreseeable but highly likely under well established transfer pricing rules let alone the generally unexplored but compelling argument for Governments under competition law.

Apple CEO Tim Cook’s well reported comment of “total political crap” would have no doubt have upset many Europeans and most certainly those in power in the more moderate EU economies. However, it may have been enough to stir shareholders in to a class action against the Directors of Apple for the aforesaid US$14 Billion. It is somewhat unusual for Directors to have sufficiently deep pockets to sustain a lawsuit of US$14 billion and both plaintiffs and defendants alike would seek to join both the auditors and tax advisers on the assumption of their much deeper pockets – in this case Ernst & Young on both counts! It should be noted here that such tax structures are rarely used once in “international tax planning” by the major accounting firms and typically are sold many, many times to any client prepared to accept that the structure actually “works” or is prepared to take the risk that the structure will pass all relevant Revenue Authorities. Of significance, on a tax structure as long dated as the Apple structure used in Ireland and in a jurisdiction as compliant as the Irish whom immediately indicated their intention to appeal against the EU’s decision, it is not inconceivable that $100 billion could be at stake on this structure alone. But let us dig further!

In the past two years, the Lux Leaks and Mossack Fonseca tax scandals have demonstrated to the public at large like never before critical a global weakness in the understanding of the international tax avoidance issue by our Political Leaders and Lawmakers. In a clearly orchestrated long term strategy by the tax avoidance industry, the perception is that because these arrangements are technically legal (in tax havens) they are somehow legitimate in nature. The reality is that the most heinous of activities throughout the history of the law have been entirely legal until they have been made illegal by the Lawmakers. In a quite extraordinary statement which demonstrates just how effective and accepted this argument on “legality” has become in relation to aggressive tax practices, President Obama in commenting on the Mossack Fonseca said:

“There is no doubt that the problem of global tax avoidance generally is a huge problem. The problem is that a lot of this stuff is legal, not illegal.

One must say that it is very unusual for the Leader of the Free World (and one I must I say greatly respect) to be so badly caught out on an issue of such global significance! The point may be valid in an insular universe of political thinking ideal for the international tax avoidance industry, but Mr. President Sir you held the keys to the nuclear arsenal capable of destroying the world how many times over for eight years and yet you could not protect the almighty United States of America against a rocky outcrop “tax haven” of perhaps 300 people somewhere out there in the absolutely nowhere with taxation laws designed to enrich the locals, enrich further the rich of the world and add to the super rich of the world devoid of any social responsibility whatsoever?

At the same time, while the Western economies have essentially been collectively ineffective on the international tax avoidance front, they have all been falling over themselves to implement what must surely be the greatest confidence trick in history. As if from the tablets of Moses, the eleventh commandant (the one that accidentally chipped off at the bottom) states:

“Thou shalt lower the corporate tax rate and receive bountiful economic returns”

While the argument likely had its origins in the establishment of the tax haven network and the requirement to fund a few hundred or thousand citizens following the loss of colonial patronage, there is no real evidence to support the argument that lowering the corporate tax rate (i.e. tax competitiveness) will lead to international economic competitiveness. Nevertheless, the Big 4 have pushed the argument mercilessly across the globe and it must be said with considerable success. Devotees of the Laffer curve suggest that a 30% corporate tax rate is about right for maximizing corporate earnings and Government revenue alike. This is a view I have some considerable sympathy with and I believe “a fair base price to pay for civilization”.

A much sounder framework for economic competitiveness has been raised annually as the “12 Pillars of Economic Competitiveness” at the Davos Economic Forum. The 12 Pillars are immensely important in developing what I believe are the real building blocks of international competitiveness through targeted tax incentives designed to reward investment risk for real growth such areas as innovation. This may be described mathematically as follows:

Good Tax Policy = Appropriate Corporate Tax Rate + Targeted Tax Incentives for Real Growth 

Merely cutting the corporate tax rate will not achieve this! Further from a tax ethics viewpoint, erosion of the tax base of any country in the world will contribute to the global scourge of stripping the global poor of necessary foodstuffs to eat, real opportunity through education and saving tens of millions of lives globally through an entirely conventional health system. In the context of a Global Financial Crisis, it also means that many Western Governments will not have the cash reserves available to buy their way out of the next GFC. So again mathematically:

Bad Tax Policy = Cutting the Corporate Tax Rate

As the reader may have gathered, we are building what is currently both a contemporary and realistic global scenario where Directors of major companies could be sued for US$15 billion for failing in their duty to appropriately manage a company’s tax risk through conventional risk management practices, potentially a US$100 billion law suit against a “Big 4” accounting firm for a single tax planning structure and perhaps potentially US$1 trillion or more in potential law suits against the “Big 4” accounting firms for tax planning structures that “did not work” all of which is likely to have every litigation funder in the world salivating at the prospect of super big pay days.

Remember, we are talking about the “Big 4” accounting firms who collectively audit 99% of all global companies with a turnover of US$1 billion, a cartel unprecedented in history and one borne to carry immense responsibility. When you consider that the “Big 4” themselves have a turnover of more than US$130 billion between them or about US$35 billion each and these guys are all in professional services so when it comes to disclosing their own financial position and insurance cover to ensure proper protection against a potentially very large figure in terms of lawsuits, we would expect a magnificent series of glossies setting down all financial and insurance and reinsurance information. After-all, these are the key factors in assessing risk and required by every client and potential client to do so and well understood by the Big 4.

Well try as my journalist colleague Michael West did, all four held a dignified silence on the matter. Although such a response does carry an implication of “unworthiness”, it does allow for some reasonable journalistic speculation on the matter. We gather that all four do self insure and, if they do, then it would usually make sense from a properly assessed insurance viewpoint to pool these risks to decrease overall risk. However, if the Big 4 individually and collectively under-estimate their insurance risk and under-insure through low premiums then they will not have sufficient insurance cover in all circumstances to meet legal pay outs. Typically, a first tier insurer will assess, pool and price risk correctly thus removing risk entirely for an insured so why take  on risk which could lead to the demise of the firm when the business is professional services and not insurance?

In part, one must recognize that each of the Big 4 firms has a strong tribal culture each purporting to be “the best”. I am the first to concede after 32 years working in various capacities with all the Big 4 firms that they are undoubtedly very good in what they do, but not infallible. A Director cannot rely on an opinion of itself before shareholders otherwise why does the role exist. A Director must properly exercise his or her judgement on the integrity of the opinion lest the opinion is wrong exposing the Director to potentially extremely large lawsuits. If this occurs, a belief in one’s case and particularly one based on cultural bravado is simply naïve when it comes to the objective world of assessing, pricing and placing risk. As a result, the insurance bastion, the first major protection of the Big 4 accounting firms, must inevitably fail.

“What about all that capital the Big 4 are sitting on?”, says the man in the corner – there must be plenty of it arising from those big profits – why don’t you look at the consolidated accounts? Excess capital is one reason an organization may embark on the risk of a self insurance policy but since not one of the Big 4 accounting firms produces consolidated accounts on a global basis it is not possible to assess this or anything else regarding the total capital position of the Big 4 and its capital implications. Furthermore, if consolidated accounts are not produced, then there would appear to be no requirement to state internal accounting firm policies either. The accounting policy for liabilities arising from existing or potential lawsuits would be an interesting one to examine as to where exactly each Big 4 accounting firm sits in terms of its conservatism or aggression in respect of lawsuits. An aggressive policy will mean that a lesser amount will be set aside for successful lawsuits which will mean a further reduction in the capital position of the firm. In a Machiavellian world provided the Partners have protected their own position and could immediately reconstruct the old firm in to a new firm, overdrawing earnings in the event of a firm collapse leaving the former firm shell with a vast negative equity position may just make financial sense. If this was the case, then this would mean a fragile capital position thus the the second major protection of the Big 4 accounting firms, could easily fail.

“They all got a big name – they can just raise capital on the market by way of an initial public offering, can’t they?”, says the man in the corner knowingly. Given the runaway success of Accenture, formerly Andersen Consulting, the consulting arm of former accounting giant Arthur Andersen & Co, this is well achievable. It is ultimately only a question of choice for the existing Partners, but there are a numbers of factors which means the process would take some years and could not be done in a time of pending financial failure.

Firstly, the Big 4 accounting firm would have to consolidate all member firms’ interests in to a single entity capable of being listed on a stock exchange from the existing position of independent ownership and the various commercial arrangements between the member firms. By way of agreement between the member firms, this is by no means insurmountable and there are specialist financiers who undertake this type of work although probably more generally in the context of merging accounting or legal firms.

Secondly, a Big 4 accounting firm would become subject to the strict listing requirements of one of the major bourses presumably either the London or New York Stock Exchanges or perhaps both in the case of a dual listing. This would then require the listed Big 4 accounting firm to make appropriate disclosures in accordance with those rules on price sensitive matters including pending lawsuits and the outcomes of existing lawsuits against the firm. Depending on the disclosure requirements, this may be a considerable challenge for a Big 4 accounting firm seeking to optimally manage its downside reputation risk in the event of an adverse Court finding. Nevertheless, the alternate argument is that the Big 4 accounting firm would merely be subject to the same disclosure requirements as most of its clients and clients would welcome this.

Thirdly, a publicly listed entity of this scale similar to the licensed insurers and banks would require an appropriately disciplined regulator to ensure that the Big 4 accounting firm would comply with appropriate regulatory standards. Again, a centralised regulatory control would be seen has highly attractive within the investment community in setting strict standards, mitigating risk and applying appropriate sanctions to inappropriate commercial behaviour by senior operatives, rogue or otherwise.

Fourthly, a Big 4 accounting firm would need to introduce the roles appropriate to a publicly listed entity for risk mitigation with the same or very similar accountability and sanctions for underperformance including dismissal. This would lead to far greater accountability for risk taking behaviour and likely reduce the frequency of such behaviours. An ounce of prevention is worth a pound of cure! There is little doubt that the investment community would perceive the introduction of a robust risk management system as an attractive feature.

Fifthly, the reward structure within a Big 4 firm where an equity Partner may earn four to ten times the income of a senior staff would require some consideration. However, given the success of Accenture this should be achievable.

Overall, it would seem more than curious as to why a Big 4 accounting firm has not chosen to go down the path of an initial public offering when it is precisely the above characteristics required for an IPO that would likely attract the leading multinational companies as their service provider from a Governance viewpoint. Furthermore from a financial position, it is also conceivable that a Big 4 IPO may attract a US$80-100 billion windfall gain in addition to shifting the burden of an insolvent firm for the existing Partners which surely must be of some interest to those close to retirement.

In the world of “black swan” events, the inquiry must arise in the case of the expected tsunami of legal claims against a Big 4 accounting firm, how much would be enough in the current circumstances to cause a collapse of a Big 4 accounting firm? Such information is obviously not publicly available but no estimate places a Big 4 accounting firm’s resilience for lawsuits above US$10 Billion. As mooted, in the discussion on self insurance and a possible joint insurance pool deliciously suggesting the possibility of the “BIG ONE” means the collective defenses of the four firms is no more than US$40 billion and may be as little as US$20 billion. It is not too difficult to assume an adverse outcome of arguably US$1-2 trillion of lawsuits arising from toxic audits and taxation misadventures. One must also recall that a single regulatory action may also cause the demise of a major global accounting firm as it did in 2002 with the US SEC withdrawing the audit license of Arthur Andersen & Co   

In such circumstances, there is a natural chain of events to global financial annihilation. If the Big 4 accounting firms collapse simultaneously and former Partners scurry to shore up their own financial positions, 99 percent of companies with a turnover of US$1 Billion or more will not have their accounts audited.  A lack of audited accounts means that these companies will not have their results accepted by the bourses and major trading markets of the world. In turn, this means that the market is incapable of appropriately valuing these companies and as a result fear engulfs all bourses and trading markets. As fear rapidly turns to panic and panic turns to desperation as stockholders scream “sell” in an unprecedented calamitous decline in stock prices where buyers are rare and proposed solutions even rarer. In such circumstances, it is simply impossible for the Governments of the world to initiate an effective and coordinated response. Suspension of trading markets is mere folly and only defers the inevitable as blue chips fall by 75 per cent, speculative stocks by 95 percent as gold hits US$10,000 an ounce and the GDP of all Western nations drops 30 per cent immediately and within weeks to 50 per cent. Buyers at this stage cautiously re-enter the shattered markets for speculative profiteering only as the Governments of the world haplessly explore “economic stimuli” with coffers emptied by decades of aggressive international tax avoidance orchestrated by the Big 4 accounting and the greatest confidence trick in history, that by dropping the corporate tax rate your country will be “economically competitive”.

When I commenced my analysis on the Big 4 accounting firms, a friend who has known me since my school days asked me whether I had a death wish? The answer is I definitely do not, but taking the opportunity to advocate positive change if one has the ability to do so is not a choice but a moral responsibility to society. As such, the same moral responsibility applies to each and every Partner of the Big 4 accounting firms.  Ethical behaviours by firms in all spheres in which they operate is clearly necessary if the firms are to ensure their longevity and their general confidence within the community. But there is also a crystal clear opportunity for each Big 4 accounting firm to break away from the curse of the archaic partnership structure and take “the profession” into the 21st century as a true guardian of international commerce. This requires a change in leadership style and direction by a Big 4 accounting firms to unwind the present Federation of individual partnership interests, National Firms and the plethora of mysterious internal international transactions which present as a Big 4 accounting firm in to a single company interest capable of an IPO. Although certainly a major undertaking, the journey of Andersen Consulting from half of the former Arthur Andersen & Co in to today’s IT powerhouse Accenture stands as a glowing precedent. But an IPO with all its regulatory requirements is only part of the solution to deliver a superior performance by the Big 4.

Given the arguable fragility of the Big 4 and their dominance in global commerce, a joint comprehensive review of all Governance and regulatory requirements within the Big 4 by the Appointed Government Auditors and Financial Regulators of the world’s leading nations appears long over-due and should be regarded as imperative.

There is no doubt global community is beginning to comprehend tax scandals such as LuxLeaks and the disclosures around Mossack and Fonseca the extent of aggressive taxation behaviours. The obvious question must arise as to why these structures were passed by conservative auditors charged with the responsibility of verifying financial statements and identifying risks to the organization.

The specific challenge for the Big 4 is to ask themselves are they true to the ethical foundations of their profession and the society around them and, if not, what should they be doing to correct this? Splitting taxation and audit services in to separate firms will increase integrity.  Splitting of tax firms and audit firms into separate firms will create competition. Such measures are extremely important to society and should be seriously considered.

Irrespective of the recommendations, lawmakers in each jurisdiction will require guidance in order to frame supporting legislation. The advantage of a principles based guidance approach is that all stakeholders will readily understand the objective of the principle prior to turning it to potentially complex legislation.

Based on the above inherent risks to global financial stability, the following principles are beyond question:

Regulatory Principle 1: All jurisdictions should ensure that an accounting or professional services firm or organization does not provide both taxation and audit services to the public.

Regulatory Principle 2: All jurisdictions must ensure that there is sufficient competition in both taxation and audit services to provide an orderly market. 

Taxation Principle 1: All jurisdictions should encourage ethical tax behaviors by way of economic incentives through discounts in the corporate tax rate or other real incentive measures.

Taxation Principle 2: All jurisdictions should ensure that appropriate punitive measures reflecting the fraudulent nature of aggressive taxation behaviors be implemented.

Taxation Principle 3:  All expenses originating from a jurisdiction internationally characterized as a tax haven will be denied a tax deduction in the home jurisdiction.

It has been put to me by a very senior Partner from a Big 4 accounting firm insolvency practice and l think a comment well worth closing on:

“Over the past 40 years, the tax divisions (of the Big 4 accounting firms) have pushed what is considered an acceptable tax risk by generally conservative companies to extreme levels without any substantive net long term economic gain. This is completely at odds to the other major divisions of any full service accounting firm including audit, consulting and insolvency where there is a true economic gain at typically reduced risk. There are two vastly different creatures living uncomfortably under the same skin. Division is inevitable!”

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