Bramwell’s Lunch Beat: China Is a Hotbed for Accounting Fraud

Is it time to consider a value added tax?
Forbes contributor Joseph Thorndike wrote yesterday that he believes the tax reform proposal by House Ways and Means Committee Chairman Dave Camp (R-MI) was dead on arrival. But he says that may not be a bad thing. It may advance the ball for other, still ambitious tax reform proposals, such as a value added tax.

“In particular, I would not be surprised to see an uptick of interest in [Columbia Law School Alumni Professor of Tax Law] Michael Graetz’s tax plan to combine a much narrowed income tax with a broad-based consumption tax,” Thorndike wrote. “The Graetz plan would fundamentally revamp the income tax as it’s existed for the past half century or more. Indeed, it would return the levy to its historical origins as a rich man’s burden. And it would pay for that change with yet another historical throwback: the return of consumption taxes to a place of prominence they haven’t seen since the early 20th century.

“But the Graetz plan would do all this, according to the Tax Policy Center, without losing money or substantially shifting the tax burden among income groups,” he continued. “In other words, it’s a grand plan but still a real one – which distinguishes it from the grandiose, unreal plans that capture popular attention every now and then.”

Accounting fraud is still widespread among Chinese companies
Also in Forbes yesterday, contributor Nina Xiang wrote there are still many US-listed Chinese companies with the potential to be hit with accounting fraud that investors do not yet know about, at least according to one China-focused hedge fund manager.

“Based on my experience and observation, I think there is still widespread accounting abuse among listed [Chinese] companies, even some large ones,” Bing Lin, portfolio manager at Hong Kong-based $1.4 billion Keywise Capital Management, told Xiang during an interview in Hong Kong.

Lin wouldn’t reveal their names, but says there are a number of common practices of misconduct. The first is revenue recognition. Lin says he sees some companies booking sales on a gross revenue basis and, therefore, massively inflating their revenue, according to Xiang.

Unfair related party transactions, such as acquisitions, are also common. Management may be paying inflated prices to a small business that’s related to a relative or friend.

IRS chief committed to new rules for nonprofits despite conservative resistance
In an interview with the Washington Post, IRS Commissioner John Koskinen reiterated comments he made earlier this week that his agency and the US Treasury Department are likely to rewrite controversial draft guidelines proposed last November to define “candidate-related political activities” that could disqualify advocacy groups from tax-exempt status.

“My bottom line is that it’s in everyone’s interest to have clarification,” Koskinen said, according to an article written by Josh Hicks. “My position since I started more than four months ago is that we ought to have clarity, and that any rule that comes out ought to be fair and easy to administer.”

That announcement brought relief to groups that want reform but feared the draft rules had gone too far. But it did little to ease the concerns of conservative groups that want the IRS to end its efforts, Hicks wrote.

Koskinen also said the agency will hold a public hearing on the original proposal around midsummer; however, the rule-making process is likely to continue through the end of the year. He offered no insight as to how the rules may change, as the agency is still digesting the more than 150,000 comments it received before the initial public-input phase ended in February.

“My goal is to have an open mind about this, so I don’t come at it with a prejudgment,” Koskinen told the Washington Post.

Criticized on taxes, Starbucks will move European offices to London
Starbucks, which has suffered withering criticism in Britain for avoiding taxes, said on Wednesday that it would move its regional headquarters to London from Amsterdam and pay more to the British Treasury, David Jolly of the New York Times reported yesterday.

The company tried to make amends by paying 5 million pounds, or $8.4 million, in taxes last year, after paying no corporate taxes since 2009 in Britain, where it has hundreds of stores. But Starbucks noted that moving senior executives to London from the Netherlands would put them at the heart of what is its biggest and fastest-growing market in Europe. It said the move would occur by the end of the year, Jolly wrote.

“This move will mean we pay more tax in the UK,” the company said in a statement. It did not say how much more.

Starbucks, a company with a $52 billion market value, became the target of criticism in Britain after an investigation by Reuters in 2012 showed that it had been reporting losses on its British operations to the tax authorities even as it told investors it was profitable, Jolly noted. Reuters found that Starbucks used common strategies – such as charging licensing fees to its British operations, assigning profits to subsidiaries in other countries, and using intercompany loans to shift profits to low-cost jurisdictions – to reduce its tax bill.

Global accounting body airs possible reform of bank hedging rule
The International Accounting Standards Board (IASB) published a proposal earlier today that would allow investors to make a more accurate assessment of how well banks manage risks on their books, Huw Jones of Reuters reported.

Banks in Europe, Canada, and parts of Asia and Latin America have to use standards written by the IASB and are required to account for hedging on an item-by-item basis, a complex undertaking.

The rule restricts banks' ability to offset positions in portfolios, which leads to accounting discrepancies, prompting the European Union to introduce an exemption in 2005 so that lenders don't have to report such discrepancies in hedging, according to Jones.

The IASB discussion paper published on Thursday outlines how the rule could be reformed to reflect the way banks hedge risks on a broader portfolio and continuous basis, rather than a point-in-time view of item-by-item hedging, the article stated.

The current rule is often difficult to apply in a situation where risk is managed on a continuous basis, the IASB said.

[Click here for another article about the IASB hedging proposal from Accountancy Age.]

E-mails show former IRS official Lerner talked with Justice Department
Former IRS official Lois Lerner talked with US Justice Department officials about seeking criminal prosecutions of tax-exempt groups that didn’t fully disclose their political activities, according to e-mails released on Wednesday, John D. McKinnon of the Wall Street Journal wrote yesterday.

The conservative-leaning Judicial Watch said it got the documents through a Freedom of Information Act request, according to the article.

In one e-mail, Lerner, who ran the agency’s Exempt Organizations division, says she got a call from a Justice official who “wanted to know who at IRS the DOJ folk s [sic] could talk to about Sen. Whitehouse idea … that DOJ could piece together false statement cases about applicants who `lied’ on their [IRS applications for tax-exempt status] – saying they weren’t planning on doing political activity, and then turning around and making large visible political expenditures.”

McKinnon noted that it appears Justice officials took the initiative to start this conversation, not Lerner. They were responding to a public suggestion by Senator Sheldon Whitehouse (D-RI), who held a hearing on the topic of political spending by tax-exempt groups a few weeks earlier.

House Republicans still believe Lerner was actively pursuing an agenda to crack down on conservative groups during the same period, in early 2013. That included setting up meetings with advocacy groups, as well as pressuring other agency officials to take actions against Crossroads GPS, a prominent conservative nonprofit, McKinnon wrote.

Quick Links:

  • Let’s discuss: Vault Accounting 50 (2015) (Going Concern)
  • Accounting for lease arrangements has evolved (Businessworld)
  • Canadian audit fees: 2012 industry analysis (Audit Analytics)
  • Non-timely filings: An overview (Audit Analytics)
  • Camp’s tax plan: Where’s the reform? (US News and World Report)
  • The case for tax reform (Politico Magazine)
  • Running away from the Ryan budget (Politico Magazine)
  • Club for Growth opposes Senate tax extenders bill (The Hill)
  • Congressman: Let’s scrap income tax (WND)
  • Post-tax filing resolution: Promise to do better (MarketWatch)
  • Donald Rumsfeld goes tax protester on IRS, but should aim at Congress (Forbes)
  • What would you say in a letter to the IRS? Former Secretary of Defense Donald Rumsfeld decries tax code complexity (Don’t Mess With Taxes)
  • Romney son takes swipe at Harry Reid on Tax Day (ABC News)
  • Man ‘seduced’ by IRS agent appeals dismissal of his lawsuit (ABC News)
  • Make financial statements useful with these 6 tips (Entrepreneur)

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