MANITOBA: Reasons to be skeptical of KPMG’s advice for the province

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Reprinted with permission from the CCPA The Monitor

 

It is curious that the Pallister government would have hired consulting firm KPMG to provide advice on how to manage the province’s affairs. Not that Canadian governments don’t do this all the time. But KPMG’s actions across the world and in Canada—some illegal, many promoting the interests of the exceptionally rich at the expense of the rest of us—suggest we should be wary of whatever input they have to offer.

In South Africa, KPMG is currently embroiled in a major scandal involving its relationship with the wealthy, influential and controversial Gupta family. KPMG SA was the auditor for the family’s companies when in 2013 several million dollars were diverted to a lavish Gupta wedding in Sun City. The company admitted in a September 15, 2017 press statement that “the audit teams failed to apply sufficient professional skepticism and to comply fully with auditing standards.”

KPMG SA also provided tax avoidance advice to Gupta businesses (offshore tax avoidance schemes are a specialty of KPMG). In the same statement last year, the firm acknowledged “it has been alleged that tax advice given to Gupta entities involving offshore structures was illegal or improper,” but added “KPMG did not act unlawfully or improperly in giving the advice.” Given KPMG’s activities elsewhere, the claim calls to mind Richard Nixon’s famous assurance to Americans: “I’m not a crook.”

In 2014 and 2015, KPMG SA did consulting work and produced a report for the South African Revenue Service (SARS). In their September 2017 press statement, the company said their own report’s findings “should no longer be relied upon” after it was revealed “to have been seriously compromised by the inclusion of at least 16 points in its recommendations and findings copied and pasted from recommendations made by SARS’ own legal representatives.”

In other words, KPMG was investigating SARS but allowed the government agency’s legal firm to write the conclusions to what was meant to be an “independent” report. The revelations were enough for South Africa’s leading big business association, BLSA, to suspend KPMG’s membership (even after KPMG SA had fired nine of its top executives). KPMG’s global chairman has apologized for the firm’s failings in South Africa, which were compared to a “near-death experience” by the new head of KPMG SA.

Closer to home, KPMG US paid a fine of $456 million in 2005 for an illegal tax avoidance scheme—part of a “deferred prosecution agreement” designed to avoid an indictment. The IRS put it this way in an August 29 statement that year: “In the largest criminal tax case ever filed, KPMG has admitted that it engaged in a fraud that generated at least $11 billion dollars (sic) in phony tax losses which, according to court papers, cost the United States at least $2.5 billion dollars in evaded taxes.”

Between 1996 and 2003, KPMG “conspired to defraud the IRS by designing, marketing and implementing illegal tax shelters,” the statement continued. Mark Everson, then commissioner of the IRS, added the following:

At some point such conduct passes from clever accounting and lawyering to theft from the people. We simply can’t tolerate flagrant abuse of the law and of professional obligations by tax practitioners, particularly those associated with so-called blue chip firms like KPMG.

Responding to these findings of illegality, KPMG said more than a dozen of its tax officials had been fired or forced to retire, and that the company had “undertaken significant change in its business practices.” Nevertheless, the firm was once again in hot water in April 2017, after it reportedly fired six employees, including the head of its audit practice in the U.S., for receiving improper warnings of impending audits by the non-profit Public Company Accounting Oversight Board.

“The announcement is another potential blow to KPMG’s reputation after questions have been raised in recent years about why it failed to uncover illegal sales practices at Wells Fargo or potential corruption at FIFA, the governing international body of soccer,” reported the New York Times.

At the same time, more than 1,000 current and former female employees at KPMG US are engaged in a class action gender discrimination lawsuit accusing the company “of developing a hostile work environment in which women are underpaid and rarely promoted to leadership roles,” according to a May 2016 report in Accountancy Age. The article adds, “the lawsuit contains details of how KPMG slashed [the lead plaintiff’s] base salary by $20,000 while she was on maternity leave because she was being paid ‘too much.’” KPMG has denied these allegations.

Still closer to home, CBC reported in March 2016 that the Canada Revenue Agency (CRA) had a year earlier offered amnesty to wealthy Canadians caught using an offshore tax “sham” designed, marketed and implemented by KPMG. Jonathan Garbutt, described as “a veteran Bay Street tax lawyer,” is quoted describing the CRA plan as “outrageous,” since it suggests “If you’re rich and wealthy, you get a second chance, but if you’re not, you’re stuck.”

Although the letter offering amnesty to the wealthy tax avoiders is silent about whether KPMG would also be offered amnesty, it was reported at the time that “experts consulted by CBC News raised concerns that the large accounting firm, with close ties to the federal government, could also be off the hook.” (A Fifth Estate/Enquête investigation later found that some correspondence from the CRA’s lead enforcer went missing and was likely deleted leading up to the amnesty.)

Starting in 1999, KPMG marketed the tax-avoidance scheme to Canadians with a net worth $5 million or more. One KPMG client told the Fifth Estate “the tax dodge was based on a simple—if fictitious — idea that ‘high net worth’ clients give away their fortunes to an Isle of Man shell company. The money would be invested offshore and would be returned back to Canada, again untaxed, also as a so-called gift.”

One wealthy family in Victoria, B.C., who put $26 million into the scheme in 2002 and 2003, is reported to have paid a mere $3,049 in taxes over 10 years leading up to 2011, while KPMG collected $300,000 in fees. When the parliamentary finance committee held hearings on tax evasion and avoidance in June 2016, the director of Canadians for Tax Fairness reported that he “got a gag order” prohibiting him or any other witness from referring specifically to KPMG, as insisted by KPMG lawyers.

It is a splendid irony that even while helping wealthy people and corporations avoid paying their fair share of taxes (and taking a cut of 15% of the taxes that are avoided), KPMG is still busy advising governments, like the one currently running Manitoba, to cut spending on public services that are important to all of us, and especially those who do not qualify as high net worth.

Given KPMG’s record, of which I am relating only a small part, why would the Pallister government have hired this company to provide advice on governing Manitoba, at a reported cost of $740,000? Either they knew the company’s history and contracted them out anyway, or they did not know, which would be just as irresponsible. Whichever the case, it seems fairly obvious whose interests KPMG serves, and that should make almost all Manitobans skeptical of their advice.

 

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