August 11, 2022

Accounting News Roundup: Ex-PwC Employees on Trial for LuxLeaks and Non-GAAP Measures Are Everywhere | 04.25.16

LuxLeaks

Two former PwC employees turned whistleblowers who leaked thousands of documents that "disclosed that the Luxembourg authorities had helped 340 big firms to minimise their tax payments" go on trial this week:

Antoine Deltour and a second man, who is expected to be named in court this week, are charged with carrying out the LuxLeaks theft, violating the Grand Duchy’s strict professional secrecy laws and other offences. Their criminal prosecution follows a complaint to Luxembourg’s public prosecutor by PwC.

The LuxLeaks scandal, which transformed the debate on international tax reform, exposed how Luxembourg had for years been secretly sanctioning, on an industrial scale, aggressive cross-border tax avoidance by some of the world’s largest businesses.

It's interesting to note that Luxembourg does have a whistleblower protection law, however it won't cover Deltour because "the law in Luxembourg is limited to corruption offences and the information he revealed did not show blatant corruption." In any case, it "only protects whistleblowers against dismissal, not against prosecution" so it wouldn't save him from jail and, in his words, "a fine that exceeds a lifelong income."

Tax Shelters

Two former Spring executives are suing the US over the loss of their jobs in 2003. 

Former Chairman and Chief Executive Officer William T. Esrey and Ronald T. LeMay, a former president and chief operating officer, sued the U.S. government Friday over claims they were unfairly forced out of the company after disclosing they were being audited over the use of shelters that deferred taxes from stock option profits. The two men are seeking almost $160 million in combined damages in a complaint filed in Manhattan federal court.

EY sold the Esrey and LeMay these tax shelters and the whole thing is a little confusing:

Serving as an adviser to the executives, E&Y helped them engage in contingent deferred swap and add-on transactions from 1999 through 2001, according to the complaint. At the time, E&Y was separately also employed as Sprint’s public accountant.

The former Sprint executives claim the IRS helped E&Y disguise the seriousness of an investigation into the shelters by striking the word "penalty" from language in a press release describing a civil settlement in 2003. The IRS did so in exchange for an extra $1.4 million included in the $15 million accord to “sweeten the deal,” according to the complaint.

Wait, would EY sell their clients up the river like that? Anything's possible, I guess, which is why these guys are suing. This all came to light only three years ago, which explains why they're bringing the suit over a decade later. 

Non-GAAP worries

The field of the race for the biggest non-GAAP worry of the year is a strong one. Right now, I'd say the two favorites are between: 1) How widespread non-GAAP reporting has become and 2) That not enough people are worried about non-GAAP measures. Gretchen Morgenson covered both on Friday:

What’s surprising, though, is how willing regulators have been to allow the proliferation of phony-baloney financial reports and how keenly investors have embraced them. As a result, major public companies reporting results that are not based on generally accepted accounting principles, or GAAP, has grown from a modest problem into a mammoth one.

According to a recent study in The Analyst’s Accounting Observer, 90 percent of companies in the Standard & Poor’s 500-stock index reported non-GAAP results last year, up from 72 percent in 2009.

I know, I know — eyes glaze over when the subject is accounting. But the gulf between reality and make-believe in these companies’ operations is so wide that it raises critical questions about whether investors truly understand the businesses they own.

Another contender is the growing bucket of excluded expenses that lead to the transformation of losses into income, which also gets a mention:

[T]he study found that almost 10 percent of the companies in the S.&P. 500 that used made-up figures took out expenses that fell into a category known as “other.” These include expenses for a data breach (Home Depot), dividends on preferred stock (Frontier Communications) and severance (H&R Block). 

It's hard to pick a winner but former SEC Chief Accountant Lynn Turner says that the SEC "just need[s] to go do an enforcement case." So I guess that's how we'll know which worry is the biggest? If a company is called out for it? Good luck trying to handicap this.

Elsewhere in financial reporting: Caterpillar pulled off a nifty trick to add 20% to its already sad earnings.

Previously, on Going Concern…

I wrote about a prospective PwC intern whose dumb behavior on the internet could result in a CLM. And in Open Items: Student Bankruptcy and Masters degree plans.

In other news:

Get the Accounting News Roundup in your inbox every weekday by signing up here.

Latest Accounting Jobs--Apply Now:

Have something to add to this story? Give us a shout by email, Twitter, or text/call the tipline at 202-505-8885. As always, all tips are anonymous.

Related articles

Monday Morning Accounting News Brief: PwC Gets Fined; Big 4: What’s the Scam?; The IRS Straps Up | 8.8.22

Across the pond, PwC has been fined $2.12 million after the firm failed to properly challenge UK telecom group BT once a half-a-billion pound fraud was discovered in BT’s Italian operations: “The sanctions imposed in this case, where certain elements of the adjustments following a fraud were not subject to the required level of professional […]