Episode 017: Prem Sikka
Emeritus Prof. Prem Sikka is a fearless accounting scholar who has exposed the complicity of the accounting profession in money laundering and tax avoidance. He talks about how academics can influence public policy, the importance of building good relationships with journalists, and what it’s like to do research where you need to consult a lawyer before publishing your work.
Transcript
Cameron: My guest today is Prem Sikka, Emeritus Professor of Accounting at the University of Essex in the UK, and Professor of Accounting and Finance at the University of Sheffield. An outspoken critic of the accounting profession, particularly in regard to the active role accountants play in money laundering and tax avoidance, Prof. Sikka is published regularly in the pages of The Guardian newspaper and in many other prominent media sites. He is both a tireless Twitter warrior and an esteemed academic researcher. Prem, welcome to the podcast.
Prem: Nice to talk to you, Cam.
Cameron: I've known you for quite a long time and I'm fascinated by the work that you do. It is quite aggressive for accounting research. You deal with some really provocative hot topics in the sometimes boring field of accounting. You look at money laundering, tax avoidance, audit failures. And you've never been afraid to be really critical of how the accounting profession fails to live up to its own hype as something that is in the public interest. So you've been doing this since the 1980s. A lot of accounting researchers are very quiet about the accounting profession, and you became outspoken early on. What prompted you to be quite so provocative in your research?
Prem: The question you pose is very difficult to answer succinctly. But in a sense, my view is that we live in a world where so many people are unable to achieve as it were, their potential. And that is partly because of poverty, homelessness, lack of opportunity, inequalities, social injustice, and even the state itself is disabled. For example, as the rich and the bigger corporations dodge taxes, move money around. And so it seemed to me that the best thing to do is talk about how ordinary people could be empowered. And that necessarily requires a look at the world of accounting because accountants are at the forefront of, for example, restructuring neo-liberalism. At the forefront of creating tax havens, tax avoidance schemes. And at the same time, they have also mobilized and perhaps even penetrated the state. They secure all kinds of liability concessions, accountability concessions. So it seemed to me that accounting was a good vantage point for studying what I call, "the dark side of capitalism."
Cameron: Yeah. So you are getting at the structures that create the situation that many people find themselves in, and sometimes the feeling of powerlessness that the average person feels in this big system.
Prem: I would agree with that. Yes, that's right. We do need to look at structures because individuals come into this world. There is nothing in their genes which says, "Well, you must do this shoddy audit. Or you must engage in tax avoidance or launder money or deprive others of a home, food, lack of education. Don't give them healthcare and so on." So in other words, lots of these things are there because of the institutional structures that we have. So in a sense, if we want to achieve some emancipatory change, we need to change the institutional structures. So that is really my main focus. But of course, that does not mean that you have to neglect the agency, the individuals, corporations or accounting firms or even other powerful actors.
Cameron: You have been quite critical, not only of the accounting profession but also of the accounting academy, the professors such as myself. You refer in one of your papers to "the silence of accounting academics." What do you see is the role of accounting academics in all of this? And why do you think so many of us are so quiet about what's going on?
Prem: Gosh, they are big questions. I would say our role is to, as it were, speak truth to power. So when you look at accounting, it is frequently wrapped up in claims of serving the public interest. Of course, accounting textbooks rarely talk about that, but if you look at accounting practices, there are a million miles away from anything to do with a public interest. So just some illustrations. If you prepare a typical income statement, it will have all kinds of costs recorded in it. Payment made to, let us say, the providers of human capital is called wage and it is a cost. The society provides education, healthcare, and social infrastructure to enable corporations and other businesses as it were to flourish. But the payment to that is classified as a cost ,that is, tax. And on the other hand, the payment to providers of capital is dividends, and that is treated as a reward. So if you look in the management accounting tax books, you will see plenty of chapters about how to control labor, how to squeeze more from labor. If you go to any accountancy firm, they will tell you how you're going to avoid taxes. But it seems very odd that something which is good for a society to flourish, that is a payment of a tax and also payment of wages to people that enable them to survive, is labeled as a cost. Meaning it is a burden, it is negative. So the self-serving answer is, if a corporation is to flourish, it must reduce the burdens, that mean impoverish the workers, impoverish society. The outcome is what? Homelessness, people not having an adequate diet in the UK. Life expectancy is now declining. There are more people at work who are relying on food banks. In 1976, the worker's share of the GDP in the UK was 65.1%. It is now 49.4%, which is the biggest rate of decline within the European Union. Yes, we are still in the European Union at the moment [at the time of recording]. And the result of that you can see all around us, in terms of social squalor. So accounting is central to social squalor. Accounting, unless we change its terms, the way it operates, the thinking it invokes, you can't really do much about the kind of society that we have. So I think accounting academics have been relatively quiet about that, I think partly because through the accounting education, especially professional education, people are conditioned to follow certain kinds of logics, and they follow them. So virtually, every accounting academic that I know, and I also did the same, we teach conventional accounting which says, "Yep, labor is cost as a burden. Tax payment is a burden. But by God, you should be maximizing returns to finance capital." And if you strip that label away, finance capital, what do you find underneath? You find that all these daily exchanges in the stock markets don't really go to companies, don't really get invested in productive facilities at all. It is what Marx called fictitious capital, basically going from one person's pocket to another and absolutely adding nothing to the productive capacity, nothing to the productivity. Somehow accounting is serving their interests. Now battalions of accountants, accounting academics, business schools are saying, "We must maximize shareholder wealth, the organization must serve the interest of shareholders," while shareholders themselves, especially in the case of large listed companies, have no long-term interest in companies. Incredibly short term. So it seems to be incredibly destructive activity being undertaken by the accounting academy. And I think people who are benefiting from that generally are not really going to seek to reform, but the academy is a little bit removed as it were from the pressures of day to day business, and should be able to stand back and address these issues.
Cameron: I've seen examples of economics taking financial accounting statements and rearranging them to create a different picture of what they're seeing. One of them was, instead of ending up with the residual at the bottom of the income statement being the profit to the shareholders, they put that in as a cost. And they move the wages down to the bottom. So after they've deducted all the other costs, what's leftover for the workers is the wage expense. And it's a provocative exercise because it makes you realize that it's a decision that's made to privilege one set of stakeholders over all the others.
Prem: Absolutely right. And we have had societies like Yugoslavia, where what you described was the common practice. And many of the productive facilities were owned by workers, and basically, anything paid to the shareholders as a dividend was a cost, so it had to be recorded as a cost. And that used to be my favorite example in the first lecture in the third year of the undergraduate degree. Give students an income statement and say, "Oh, let's discuss this." Before you know it's, hands go up saying, "Sir, this is wrong …”
Cameron: Yes. “It's wrong!”
Prem: “... dividends are shown as a cost." But why is it wrong? They have no idea why. In other words, accounting inculcates a certain kind of logic, and that is what it is. I mean, I had an interesting experience. I was appointed an advisor to a UK House of Commons Parliamentary Committee, which is called the Work and Pensions Committee. And it was investigating the collapse of a big retailer, which is BHS. And I had background meetings. And invariably the question arose, "Okay if the current accounting is rotten, what are the alternatives?" And that is very difficult to answer because if you talk to economists, they can talk about Chicago economics, Keynesian economics, post-Keynesian, Marxist economics. Now they talk about modern monetary theory. But as accounting academics, we have not really created an alternative framework in terms of numbers and practices which can say, "Okay, current accounting is rotten, now here is an alternative, and if you look at it through that lens, this is what the companies should be doing." Of course, you could not lecture a parliamentary committee on Marxist accounting or anything like that, but I think it's a huge gap. And every time there is a scandal, there is this question, "What to do?" And all that usually happens is everybody ends up merely tweaking what the current practice is, rather than saying, "Look, we have developed an alternative set which could give you different answers, or perhaps at least deal with the worst aspects of the current practices."
Cameron: Yeah. As has been said, the solution to any accounting failure is always more accounting.
Prem: Well, yes. But it could be a different accounting really. And also I think depends on how you create even the accounting that we have now. At the moment, we have an International Accounting Standards Board, the UK has its own accountancy regulator called the Financial Reporting Council, soon to be replaced by another. But these organizations are essentially dominated, controlled, by corporate elite, big accountancy firms, and they bring particular logic and worldviews. So what we need to do is either as academics, says, "We are going to issue accounting standards. Nothing to stop us doing it." Indeed, I would love accounting academics to get together and issue alternative accounting standards but they have not. Or at least, we can put different kinds of people into the bodies like the UK Accounting Regulator. That means there is a diversity of views, different worldviews. Maybe employees, consumers, others can bring different answers. But here is again an interesting example I can give you. I'm a co-founder of the UK's Tax Justice Network, which has now become a global organization. And this network created what is now called country-by-country reporting. The foundations of that were laid in 2003, and the original paper is still on the website of the Association for Accountancy and Business Affairs. And because we went to the UK Accounting Regulator, went to the ISB, we said, "Look. When we look at company accounts, we have no idea how much tax the company has paid in each country. Can we talk to you?" They've refused. The UK Regulator refused, the ISB refused. So a person, part of our group, took the initiative, drafted, and the rest of us campaigned, and now it is a good challenge that that will become a global standard through the European Union. Even in the US Senate, it has received considerable support. And certainly, the UK Labor Party is now committed to making that part of the law in the future. So I think again, that just shows that if a bunch of people get together, they can against all the odds do things. People say that is difficult, sometimes when I speak to academics, they say to me, "I am busy. I can't do everything." I have a lot of sympathy with that and I would say, "Look, nobody can do everything. But everybody can do something. So let us do something."
Cameron: I want to look at some of the research that you've done that has led to these kinds of insights that you've developed. I want to start with a paper that you wrote in 1998 with a couple of esteemed co-authors, it was called, "Sweeping it under the carpet. The role of accountancy firms in money laundering." Everybody has heard the term money laundering. Can you define it in simple terms?
Prem: I think one would say it is illicit financial flows.
Cameron: So when you say illicit, does it have to be illegal to be classified as money laundering?
Prem: No. I would say it is much broader than that. That's why I use the term illicit rather than illegal. There are all kinds of ethical issues as well because money may be moved around, it may be legal, but there are negative ethical implications for people. So, for example, people would say tax avoidance is not illegal. But in my view, it has huge negative consequences in every respect. For example, I think Canada is facing a general election. Have you had one?
Cameron: No. Coming up [at the time of recording].
Prem: They have a general election coming up soon, we may have one. So political parties might say, "Look, you vote for us and we will invest more in education, healthcare, pension, security, transport, you name it." You say, "Yeah, I like that. I'll vote for you." So you put a particular political party in office. The very next day, the big accounting firms say, "Tough. You elected a government. But actually, we are helping our clients to avoid taxes. Therefore, there will not be revenues to achieve what you have voted for." In other words, they exercise ultimate veto, which has huge negative consequences on lots of people's lives. So in my view, that is illicit, it is unethical. And so I'm not constraining, not confining, money laundering just to do with law. It is much bigger.
Cameron: Okay. So, the case that you described in this paper is about a Tunisian oil company that was headquartered in Jersey, which is one of those little islands in the English Channel. What's the significance of Jersey in this particular case? What's going on with the Channel Islands and tax?
Prem: Well, Jersey, Guernsey are part of the Channel Islands. In common with many other tax havens, there is considerable secrecy which has provided generally low or no taxes. They will say they enforce rules and laws, I'm sure they do, but those rules and laws also facilitate secrecy. So if you want to engage in tax avoidance, money laundering, one, you must have secrecy. Two, it must have help on professional experts who can navigate the global architecture of the financial flows, and Jersey provides that. And the worst thing is, it is protected by the UK because it is a UK Crown dependency. What that means is, the UK government is legally and morally responsible for its good governance. So I got involved in Jersey in the 1990s, paid a few visits, and it was not to my liking what I saw politically there, though it had nice beaches and plenty of sand and sunshine. But I came to conclude that the tax havens were sunny places for shady people. That is where the shady people go, to tax havens.
Cameron: The paper is quite detailed in its description of what happened with this particular oil drilling company. The paper talks about an accountant who worked there who altered 27 different orders, totally more than $10 million in value, making those orders payable to a series of shell companies that were all managed by one small little accounting firm on the Isle of Man. Again, one of the Channel Islands. So it's quite intricate what was going on. But also you, as a researcher are able to describe in considerable detail what was happening. So what was your data there? Were you looking at court cases or what?
Prem: I think if you go with primary evidence to any academic journal, they will not publish it. They would be afraid of the backlash, maybe even lawsuits. On the other hand, if you go to a newspaper, depending on its bend and financial resources, they will possibly tackle it. That's been my experience over the years. So this paper you're referring to, firstly it went through four legal opinions before it could be published.
Cameron: Your academic paper had to be legally approved?
Prem: Yeah.
Cameron: And who was concerned about that? Were you concerned, or was your university concerned?
Prem: Well, let me sort of go through the details. Firstly, we ourselves, the authors, were concerned because we had some data and we were wondering about what could we do with it. So we took legal opinion and that cost a fair bit of money. And the difficulty is, once you go to lawyers in order to justify their fees, they will tell you something needs to be changed. Otherwise, how do they justify their fees? So we then had to act on the lawyers' advice and revise the paper. All the lawyer would say was that this reduces the chances of the third-party seeking redress against you. Does not mean it's eliminated. So after that, we presented a paper at a CPA Conference. I remember it was in New York. And so we presented that. After that-
Cameron: Just to clarify for the listeners, the CPA conference that you're talking about, it's not for Certified Professional Accountants. This was the Critical Perspectives on Accounting Conference, using the same acronym but for quite different purposes.
Prem: Yes. And so after that, we decided we would submit it to an academic journal. And we submitted it to an academic journal. And the editor then thought it would be a good idea to get a legal opinion.
Cameron: Again.
Prem: Because one of the reviewers was suggesting as well, that the editor should get a legal opinion. Though another reviewer was quite critical and wondering why we were not using primary evidence. I'll come to that in a moment because we had to use secondary evidence. And so the editor then sought legal opinion. And naturally, lawyers’ fees had to be justified and the lawyer said XYZ needs to be done. And after that, the in-house law department of this international publisher took over. And so basically eventually, the paper got truncated, we had to make all kinds of edits because at the end you are in a power relation as it were: us poor academics on one side and a huge publishing house on the other advised by lawyers. And whose opinion is going to carry more weight? Certainly the lawyers'. So we've made a lot of changes. But subsequent to publishing that paper in a journal, we added more to it and published it ourselves. There's a free monograph online it's called The Accountants' Laundromat, which restored all the cuts and added more to it. Now how did I come across this? Initially, it was a court case reported in the newspaper where the judge very strongly condemned an accounting firm for being directly involved in laundering money. Now the difficulty is after that, it becomes very difficult to research because you go to parties and they don't want to talk about it. So I remember phoning up a partner of the accounting firm implicated in that, "Can I come and interview you?" "No way. No chance. None." So the other thing is, the issues were all so murky, as explained in the paper. So I made some contacts with journalists who were publishing these kinds of stories as well, something I've always done for as long as I've been an academic. For example, if I see a story in the newspaper, which is interesting, I would phone up the journalist to congratulate them and say, "By the way, this is great, but have you thought about this, this, this?" From this, a certain trust and friendship developed, which is very, very useful. So again, I developed these kinds of relationships with the journalists who are writing stories about that particular episode. And they had lots of questions. So those questions were then channeled through questions in parliament. As you've noted, one of the authors, co-authors of that paper was Austin Mitchell who then was a member of the UK House of Commons, now retired. And then there were lots of letters exchange with the ministers because we were interested to note that despite a very strong court judgment, no regulator wanted to investigate. So we wrote to the police, Department of Trade, Institute of Chartered Accountants, the Attorney General, even the then prime minister, John Major. They all deem it to be a task for somebody else. Nobody wanted to investigate. Nobody wanted to look.
Cameron: Just to clarify, the case that you're talking about, the court case was actually a civil lawsuit. It was not a prosecution for a crime or anything. This is a civil lawsuit, wasn't it?
Prem: Absolutely right. But it was a judgment given by the High Court. So one assumes that the High Court examined all the evidence, the documents, and came to conclude that accountants, if I may use the phrase, "knowingly laundered money." So the question then is if they knowingly laundered money, why are they not being investigated, disciplined? If there is one exact instance, there may be others. But at the end, nobody wanted to know. And that itself is quite intriguing and offers some insights into what we might call the nature of the state, its role, function, what it protects. And that kind of thing actually carries on in the UK, because in subsequent years I got involved in another similar episode. So in 1991, the UK closed what is called a Bank of Credit and Commerce International, BCCI, which at that time was the largest banking fraud of the 20th century. But to this day, there has been no independent investigation. Which is quite staggering that the biggest banking fraud 20th century was not investigated. So I co-authored a paper about the closure of this bank with Patricia Arnold, a US academic. And as part of that, Pat came across some filings in the US Congress Library, which basically gave clues to who was benefiting from the real or alleged frauds. There was also a US Senate report. But in the UK we had no such information. So as soon as the UK introduced the freedom of information laws, I within a month or so put in a request to see the document which was sitting in the US Congress Library, which with hindsight we learned that was only 99% complete. At that time, we did not know. And the UK government, despite the awareness that this document is sitting in the US Congress Library, refused to provide me this document. They said it is secret, I can't see it. And then I went through a legal process where I represented myself in court, took five and a half years taking on lawyers for the Treasury, the Information Commissioner, and at the end I got a unanimous judgment from three judges saying that government had to release the document to me. And as a result of that, there were changes made to the UK freedom of information laws -- I won't bore you with that -- two changes had to be made. And I also now wrote an academic paper around it. I sent it to a very prominent journal and the reviewer said I must do more case studies. And they recommended it should not be published. I thought, well, somebody might be interested in knowing what happens when you confront these things because I had to argue my case on paper because I couldn't cancel my classes and go to the court. So I chose the option of writing on a paper. So at one stage, I remember writing 41 pages for the benefit of the judges, why it is in the public interest for me to have this information. I could not simply theorize in an academic sense, just to say what public interest could be or is. I had to talk in practical terms. And that took quite a long time. But nevertheless, the good part is at the end I submitted a paper to another journal and I got published. So which means the information is out there. But I think in a sense that comes back to your question earlier about academic silence. If we can't get certain things published, or imagine if the editor of the journal who would publish the money laundering paper was not supportive, we would not have this case study in money laundering. Which I think, some 20 years later -- that paper was published in 1998, I think -- it's still probably the only decent case study showing how accountants are involved in money laundering. So what happened as I was saying earlier, in that case, is, I then collaborated with a lot of journalists. They shared data, they had very important data, and at the end, we had some primary data. But the lawyer said, "You're in trouble if you use it." Therefore, the paper had to be based on secondary data. And you won't believe, one of the reviewers suggested they should be rejected because it is based on secondary evidence. But the editor, the late Anthony Hopwood saw and fully understood what the issues were. And he said, "No. I'm going to support you to publish this and if I have to get a legal opinion, I'll get it." So that was good. But again, the reviewer was saying don't publish a paper because it's based on secondary evidence or yeah, after five and a half years of legal battle, you've only got one case study. I think that itself is a form of silence and silencing. How are we going to engage with the world? How are we going to explore it if we don't do these kinds of things? So that to my mind is quite disturbing. I remember submitting a paper, dare I say to the American Accounting Association annual conference, to the Public Interest section. And my paper was about accounting and human rights. I got a half a page review where somebody said accounting has nothing to do with human rights and rejected my paper, and better was to give me a poster session. I took it. I said, "Well, at least I'll be there. I'll talk to some people." So again, that was quite, to my mind, staggering that here is a group of academics devoted to broadening possibilities of accounting research and things. But actually, they themselves are captured by this narrow thinking about accounting. Now, can you think of any human rights violations by corporations which are not connected with profit, finance, taxes, accounting, accountants, lawyers? And I've found that quite staggering, to say, "Well, accounting was nothing to do with it." And I then actually appealed to the convener and the response was, "I have not had time to look at the paper. I'm busy. But I'm happy to be guided by my reviewers." And that was the end of that.
Cameron: Oh, goodness. You have through all of this work developed an ability to explain these things to a non-academic audience maybe partly conditioned by the experience you had tried to explain it to a judge. So you've been able to take that capacity and get more involved in publicizing these sorts of things in the media. One of the things that you write about is tax avoidance and tax evasion. Both the individual taxation problem of the tax havens that are set up for wealthy people to protect their wealth, like in the Cayman Islands, for instance. But also looking at how corporations avoid taxes through transfer pricing and offshoring of profits and that sort of thing. In all of this, the accountants are completely complicit, to the point of the accountants being the ones that are consulted by the government to develop new tax policy, because it has to be accurate and has to make sure that it works with the way accounting is done. It seems to me that the accounting firms and turn around and sell advice to the clients on how to beat the tax regulations that they just advised on. So there's this incredible complicity of the accounting profession in all of this.
Prem: Well, yes. They are central. I would say that the Big Four accounting firms are really the epicenter of global tax avoidance. We have had scandals in Canada as well, which implicate big accounting firms. And they are playing both sides of the street. They are batting for the state, against the state, batting for the corporations. And generally, they are getting away with it. Whenever, for example, in the UK, if an occasional court case is brought against a particular tax scheme and the judgment is favorable to the tax authorities, the tax authorities don't follow it up with an investigation of the accounting firms or penalizing their partners. But all that has to change. But I think the important thing, what I've been trying to do through the various articles in the popular media and also working with political parties and through the Tax Justice Network, what we have tried to do is sensitized to the public about this thing called tax avoidance and that it has negative consequences. I think we to some extent have achieved that. There are regular stories about that. Behind that, there are other stories. For example, in the early days, we had huge problems in trying to persuade journalists to report on these things. The response was, "I don't know where to look." So in the early days, a bunch of us did one-to-one tutorials. "Okay, we'll sit down with you. We'll show you where to look. What the key ideas are." And that then mushroomed into bigger groups and seminars. So the Tax Justice Network now organizes an annual four- or five-day session for journalists from other countries who come to the UK, generally from developing countries. They are shown what to read, where to read, what does it mean. And I've seen every one of them write stories about it when they get home. So it's the old, biblical idea, teach a man to fish and he will feed himself for the rest of his life. So we teach them how to look at these documents. And some of the journalists who we train are now at the International Consortium of Investigative Journalists, people who expose Paradise papers, Panama papers, Luxembourg papers, and many others. So they're gone over there. But in earlier days it was quite hard work, just sitting down, persuading them to have a look. So we're proud to do that. Of course, it has benefited my research as well because often you can talk to them and find out more details. One of the things people often levy as a charge at my research was, I don't report many interviews. Well, the thing is, actually I have continued to do more interviews than probably most academics. So in a sense, imagine if I, for example, know quite a few corporate executives. Yesterday I was meeting the head of UK banking regulation. But I know lots of corporate executives. Can you imagine, you go to a corporate executive and have a 20-minute chat and say, "How does your tax avoidance scheme work?" There's no way they're going to tell you. But if you meet them and after 20, 30 years -- and some of them I've known for that long -- they get to know you. You can ask that kind of question, you can consult. "What is the key to this, after, for example, a court judgment?" They will tell you.
Cameron: So they're helping you to understand. But they're not necessarily ready to go on the record and be quoted?
Prem: That's right. That's right. They don't want to go on record, they don't want to be quoted. But nevertheless, they can provide you an understanding, an insight. So I often talk to say, people working for big banks, and you ask, "How does so-and-so work? How do you short sell the pound sterling at the moment, as they are they doing? Is it regulated?" Yesterday I learned from them that it's not regulated. There's no central registry in the UK. You can short sell pounds sterling, no regulation. But if you short sell corporate shares, company shares, then there is a registration process. So you learn these kinds of things by talking to people. So just because we don't mention in your academic papers that you've done 100 interviews, here is content analysis -- I think that just adds sophistication but actually lacks content.
Cameron: That's interesting.
Prem: So I'm afraid I always have relied on lots and lots of discussions. Lots and lots of research. I live about an hour train ride from central London. And if I go to London, it is usually back-to-back meetings starting at 9:00 AM, finishing about 8:00 PM. An hour here, an hour there. Lots of people. Sometimes just sitting around a cup of tea or coffee or a pint of beer. You're just having a chat. So it's not "10 or 15 minutes, thank you very much, you go." So you learn quite a lot. So I think again, to my mind, that is really a part of a research method.
Cameron: It's a very patient method.
Prem: I think you have to build these kinds of relationships. But as I was saying earlier, and I even do it now though I am semiretired. If I see a story in the newspaper and I like it, I will contact the journalists. And it is very rare for these journalists to get a call from a professor to say, "What a good report you've done." And if I see some corporate executives get quoted, they don't have to agree with me. For example, if somebody says corporate executive pay is too high, it is harmful, I would go out of my way to phone them. And a number of times I would leave a message with their secretary and then be utterly surprised that you get a return call.
Cameron: It's a fascinating collaboration that you've developed over the years with journalism, with journalists, because it's like you then have two ways of getting information into the public. One is the longer term, slower research of the academic, and then there is the shorter, more up-to-date research of the journalist. And both are heavily dependent on really solid research. But there's different time frames and different ways of expressing things that are possible in each venue.
Prem: The journalists obviously are not going to read academic papers. The language, the length, is beyond them. And even worse, most of the academic papers are behind pay walls. I remember recently writing a huge, 74,000-word report on the reform of the audit industry. And one piece of research I came across in an academic journal said, where the alumni of the Big Four firms hold a senior position in a company, on the audit committee or on the board, and one of these Big Four firms comes to audit them, the auditors tend to be less skeptical. So, lo and behold, pretty soon that is an issue. And I'm speaking to a journalist, I said, "By the way, there is this academic research. Have you thought about citing it?" And she said, "Where is it?" She said, "I haven't got the time to read it." I said, "Don't worry. I'll just tell you what it is about." And I passed it, and there it appeared. Actually, it was in Financial Times. So I'm just saying as academics, we just publish papers in academic journals. We don't think about audiences, whether it is regulators, whether it is journalists, the ordinary person, because we do have in some senses to reposition their common sense. And that is why we continue to problematize the claim that accountants are ethical, they serve the public interest, accounting is factual. We all know there's no such thing as factual in any ultimate objective sense. But that is nevertheless, it goes on. I met somebody yesterday talking about our auditing or they're talking about risk-based auditing. I said, "That is a terrible thing." And, "What! What do you mean risk-based on the thing is a terrible thing? As a firm, we have to be efficient, we have to do this, this, this." I let them rant on and then I'll say, "Yeah. But what about the risks to society and the public? You're only looking at risks for yourself and your audit fees and cost to your potential clients. What about to the rest of us of what you are doing?" I got the impression they hadn't really thought about it. So as academics we can bring a fresher perspective, hopefully infuriate some people, galvanize some people, to get something out there. So out there the public space is crowded and it is best not to have too many vacant slots -- we can get into that. Try to persuade people. And that is why I work with legislators to say, "Look, I'm no match for the big accounting firms and corporations, for their lobbying and skills and lawyers. But nevertheless, I can do something." And it is better to do something than nothing.
Cameron: You've actually advocated for the idea that these Big Four accounting firms, the transnational accounting firms, that they should be broken up. You think that they are too big.
Prem: I think there are a whole range of reasons for breaking them up. Smaller audit firms would say, "Break them up." But actually, if you break them up say into audit/non-audit, compared to the audit/non-audit of the medium-sized firms, they're still too big. So just breaking them up in that sense does not solve the problem. I want to break them up for a different reason. Firstly, they have a habit of holding the state to ransom. So a good example, a paper I published about how the big accounting firms tried to get the limited liability partnership status in the UK. And the UK state had a lot of reservations. So Ernst & Young and PriceWaterhouse spent --this is the mid-1990s -- £1 million of their own money, drafted a bill, and they went to the Island of Jersey. In common with other tax havens, if you are big enough, powerful enough, you write your laws, they will pass them. Okay, so they went to Jersey and the idea was to use Jersey as a lever to get concessions in the UK. So the public threat was if the UK government does not give us this, we would uproot our operations and go to Jersey, which to my mind had absolutely no real economic substance. But nevertheless, that is what they said. I then got a phone call from a legislator in Jersey, because of, I suppose people might say, reputational effects. He said, "Well, we've got this bill going through. We've got two hours allocated. And we've been told by powers-that-be no questions must be raised." They said, "I don't understand a word of it. I'm told you can help. Can you have a look?" I said, "Fax it to me." In those days we had a fax machine. I said, "Fax it to me." And I looked at it and I said, "Oh my God, it's a terrible bill." For example, accountancy firms had all the protection from lawsuits, virtually no liability, no public accountability. There was no section in this bill, "What if a firm is insolvent? What happens to the assets?" Nothing. So I got back to this guy and I said, "Look, this is a terrible bill." He said, "I still don't fully understand. Can you come to Jersey?" So I got going to Jersey the following week, got on the plane. And that's how I started looking. And that's when I discovered what the tax haven it is, what goes on. So it is, tax havens don't just do tax avoidance, they also do regulation avoidance. So basically it's legislature for hire. It is for hire in the US, UK, Canada and other places as well. But this is blatantly for hire. So basically these big firms were getting the laws they wanted and they were holding the UK government to ransom. And my view is, that can't be permitted. Therefore, they're going to be cut down in size. That is one reason.
Cameron: Just a practical question, if you break them up into smaller firms, who audits companies like Apple and Walmart? The big transnational companies. And Ikea?
Prem: Well, many of the medium-size firms also have international networks. So that could be done, or we could look for alternative arrangements. For example, in December, I think it was November, December last year, we submitted a report to the UK Labor Party. When I say we, there's about 13, 14 of us. And it is called, Reforming the Auditing Industry, it is free on the internet. And one of the recommendations we have made is that for the financial sector, the state should create an independent body to conduct the audit. Now we immediately run into difficulties, that if the state creates this body, it may be able to audit, let us say, the bank or insurance company in the UK, but that entity may have subsidiaries in other places. How on earth are you going to audit that? So we deal with that by saying, "Look, you become the responsible auditor." You then put out a tender to say, "Look, this bank X has subsidiaries in Canada, US, Bahamas, Singapore, or anywhere else, they need an audit. Do you want to bid for it?" Anybody can bid for it. The local firms from those places can bid for it subject to the appropriate legal formalities being completed. So that way you could get a global audit coverage. But the model I'd just gone through, it has significant advantages. For example, if a firm in Canada bids for the audit of a UK bank's subsidiary in Canada, then it would be an agent of the principal in the UK. It cannot say we are not going to show you the files. It cannot say we do not owe you a duty of care. It's remit would be provided by the principal. So we have had situations in the UK: for example, in the mid-1990s, a bank called Barings Bank collapsed. The Bank of England was a regulator. The audit of the Singapore office where the frauds were perpetrated were conducted by Deloitte, and Coopers and Lybrand. Coopers and Lybrand is now part of PricewaterhouseCoopers. But they did not allow the Bank of England access to the files or allow it to interview any of the audit staff, on the basis that the firms in Singapore, though they had the same name, were separate national entities.
Cameron: Of course.
Prem: So the regulator could not investigate. And the same happened for the BCCI collapse, which I mentioned earlier, as well. The regulators were unable to get access to the firm's files or stuff. So the model I just presented to you, of how a state body could do this, well, then we can override it. And this state body would simply do audit, absolutely nothing else. You don't expect your tax authority, which conducts tax audits at the same time to become an advisor to companies and say, "By the way, we will show you how to dodge taxes." It does not happen. So in other words, there comes a time when you have to say what is desirable? What is desirable at the end is that you want society, people, to have some confidence in the audit process. The firms are just a means to an end. If they do not want to do that, or their priorities are their own profits and businesses, as academics we can develop alternative solutions. Now, it may not happen within our lifetime. The model I suggested, it may not be implemented, but the idea is there. The ideas don't easily die away.
Cameron: Right. The seed has been planted. The kind of work that you're doing, Prem, is really quite remarkable because it is so engaged and so practical and so thoughtful. It is so far removed from the distant objective academic, sitting there, taking notes and publishing papers for academic audiences. You're really involved in the practicalities of how accounting happens and what could be done differently. And it's quite amazing to talk to you. Thank you so much for your time today. It's been very generous of you. I am looking forward to seeing you next year. You're coming to Toronto to be the keynote speaker at a conference that I'm helping to organize here at York University. So I look forward to seeing you then.
Prem: Well, thank you, Cam. And I look forward to seeing you in Toronto and hopefully speaking to you before that sometime.
Cameron: I hope so too. All right. Thank you so much, Prem. Much appreciated. Bye now.
Prem: Bye-bye.
Links
Prem Sikka on Twitter
His articles for The Guardian
The Spiders’ Web, a film featuring Prem Sikka, and the film’s official website
The Accountants’ Laundromat, by Austin Mitchell, Prem Sikka, and Hugh Wilmott
Credits
Host: Cameron Graham
Producer: Bertland Imai
Photos: ResearchGate, The Accountant Online
Music: Musicbed
Recorded: October 2, 2019
Location: York University, Sheffield University
