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Financial Times: The truth will out: healthy capitalism requires honest realism

By Martin E Simons

Published: September 4 2007 03:00 | Last updated: September 4 2007 03:00
From Mr Martin E. Simons.

Sir, Three main inter-related aspects of the current financial turmoil have attracted insufficient comment.

First, how odd that the use of conduits by banks has not led to searching questions. These vehicles are run by banks which consolidate the resultant profits and losses. Why is there no audit qualification if the related assets and liabilities are not consolidated? We have had the implosion of Enron and a world-renowned firm of accountants linked to the use of conduits. Why are such frothy practices still apparently acceptable?

But perhaps the accountancy profession, in its endeavour to boost income further by helping clients to minimise upfront tax payments, has in part lost the plot. Future tax payments, sometimes delayed for many years, do not pay for current public expenditure, as Christopher Sanger notes (Letters, August 30).

In July 2004, John Plender and I, in two full-page articles, highlighted tax avoidance by the top 20 UK subsidiaries of foreign groups which together paid a smidgeon of upfront corporation tax. Similar practices by many UK quoted companies are now highlighted by the National Audit Office (front-page report, August 28). Tax avoidance is a part of the corporate profit imperative, which in turn is encouraged by mega performance bonuses. Little account appears to be taken of the consequences. For example, it is debilitating for the UK that head offices are moved to the Netherlands because the latter “is well known as one of the best tax climates for companies” (Royal Dutch chairman, annual meeting 2006). That will have been a factor influencing the location of Shell’s headquarters. The same will happen if Barclays moves its head office to the Netherlands and if ICI succumbs to a Dutch bid.

Your editorial “An unbalanced tax” (August 28) makes the important point that our system of corporation tax is far from ideal and that the Treasury should look for improvements carefully. What you fail to highlight is that the Treasury has known about this grave problem for many years and has done little to address what in some cases are unacceptable practices. Instead, it has increased company tax on seed corn start-up and other small companies unable to manipulate the location of their profits. It also mulcts with inheritance tax an ever-growing number of estates just because house prices have gone through the roof due to grotesque City bonuses.

Finally, the rating agencies are currently being slated for inappropriate assessments of debt vehicles. But what about remuneration consultants and remuneration committees, who sanction bonus schemes that have led to financial make-believe with little or no bearing on the reality?

It is bizarre that bonuses being paid this year are based on what retrospectively have been found to be dubious profits of earlier years. The public at large will now have to carry the burden of inappropriate bonus schemes which undermine prudential corporate reporting and accounting. We, as a society, will be poorer as a result of these excesses. Healthy capitalism requires honest realism. It is time that we reassess our commercial and social values.

Martin E. Simons,

London SW1S 6HJ

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