Global ethics and international accounting standards

The Publish What You Pay campaign is where international politics, financial reporting, and the developing world intersect. The campaign seeks to force companies in extractive industries (such as oil and gas) to make public their payments to governments in the developing world.

It began in 1999 with an “exposé of the apparent complicity of the oil and banking industries in the plundering of state assets during Angola ‘s 40-year civil war. It became clear that the refusal to release financial information by major multinational oil companies aided and abetted the mismanagement and embezzlement of oil revenues by the elite in the country.”

The campaign is supported by numerous charities and political organizations such as Oxfam Great Britain and Human Rights Watch. They lobby bodies like the World Bank and IMF, as well the IASB, the International Accounting Standards Board.

Publish What You Pay calls for an International Financial Reporting Standard for the extractive industries to include a requirement that extractive industry companies disclose in their accounts all payments that they make to the governments of countries in which they extract resources, and to agencies or representatives of those governments.

Sounds like a good idea to me. It’s actually surprising to me as a young idealist that this isn’t already part of international standards. But the most recent letter sent from PWYP to the IASB on the matter expresses the campaign’s consternation with the IASB’s actions to date, and I have to agree.

The IASB’s proposed standard leaves segmentation up to management’s discretion, rather than mandating country-by-country grouping. The standard is barely even that – it basically just codifies laissez-faire.

I’m dismayed to say the least by the lack of support this has received from the Board thus far. In a few years I will be working primarily with IFRS as Canadian GAAP converges. I’d like to see a greater sense of urgency on their part in matters of this importance.

The PWYP letter smartly points out “companies already need to generate [country-by-country segmenting] in order to complete tax returns in each country of operation, this should not prove an additional burden.” They also use the lingo: “The citizens of [poor yet resource-rich] countries are important, if non-traditional, users of financial information.”

This is one of those areas where the IASB could showcase those pervasive qualities in public accountancy like ethical conduct and protecting the public interest.

Why the estate tax is a good thing

You can count on only two things in life – death and taxes. Actually, more like two and a half things, because there is also taxes upon death. The estate tax raises revenue by taxing the wealth people leave behind when they die.

That’s a good thing. If we could, I would suggest only taxing dead people. Dead people can’t complain about all the taxes they have to pay. The people who complain about the estate tax are the people who inherit less because of it.

The Tax Foundation has a recent blog post in which they again try to attack the estate tax. They link to a “provocative new study,” in their words, that

“undermines a central argument made by proponents of the estate tax: that it helps reduce the concentration of wealth in the economy.”

Seems to me that if estate taxation fails to reduce the concentration of wealth, that would be a reason for opponents of the tax to pipe down, not up.

The study: “It is commonly assumed that inheritances are a major source of wealth inequality and that the offspring of wealthy families tend to be as rich as their parents due to bequests.” Dude, I don’t need to assume that – I see it every day. That’s not an assumption, it’s a plainly undeniable fact.

“For most estates larger than $5 million, the effective tax burden is only 13.5 percent to 17 percent of estates; in fact, the burden tends to fall primarily on smaller estates.”

Well, heck, if the small-fries are getting hit the hardest, why are the big guys so up in arms? If the rate is so darn low, what’s the problem?

As far as I’m concerned, as long as we’re still primarily raising revenue by taxing income, capital and property value (all very flawed methods), we might as well keep taxing dead people.

Chuck Norris audit jokes

Sometimes when you search Technorati blog posts for the term “auditor” you get some interesting results.

Highlights from a post on a MySpace blog by a guy who worked on the Enron audit with Arthur Andersen simply titled “Chuck Norris – Auditor“:

  • Chuck Norris does not accrue for expenses. He accrues for pain.
  • Chuck Norris not only assigns useful lives, he takes them away.
  • If he finds an exception, Chuck Norris amortizes pain over the remaining useful life of the client.
  • What’s the risk of significant misstatement? A Chuck Norris roundhouse.

Some of them are kind of funny. His previous blog post was titled: “Are you an auditor or prostitute?”

Sometimes you find the most creative stuff on MySpace.

Loading springs and dodging bullets

Two terms, “spring-loading” and “bullet-dodging” have reminded me of the tendency in business to put a positive spin on negative practices.

Spring-loading refers to the practice of granting options immediately before releasing good news that will likely increase the stock price, resulting in options that are not in the money technically when granted, but are, shortly thereafter.

Bullet-dodging refers to the practice of granting options immediately after releasing bad news that will likely decrease the stock price, resulting in options that avoid being further out of the money had they been granted before the news.

These practices are shady, dishonest, and similar to insider trading in that they take advantage of the difference in information that company insiders have compared to outsiders.

The use of options to motivate management and align their interests with that of shareholders is still relatively new, but it’s increasingly subject to manipulation that is unfair to ordinary investors.

Along with the ongoing SEC investigations into backdating of options, future investigations into spring-loading and bullet-dodging could turn up more violations of ethics in business.

The attractiveness of options continues to decline with every instance of abuse. As Jack Ciesielski points out:

What made them attractive in the first place was that they were “money for nothing” with little visibility into their disbursement.

Now that options are getting the publicity they deserve, and none of it positive, their use will stay in the spotlight until ethical use becomes the norm.

What do you think about the use of options as compensation? Is spring-loading and bullet-dodging really wrong, or am I up in arms about nothing?