August 26, 2013
*OPINION: Strong powers may prevent the new Transparency Act on extended country-by-country reporting from being premised on real accounting figures. This may result in reporting being diluted, less credible and more expensive to implement than necessary.*
_This is an opinion piece written by Mona Thowsen, sec, gen., PWYP Norway. The opinion piece has been published in the Norwegian newspaper "Klassekampen". You may publish this on your web side by linking to our website._
The deadline for submitting consultative statements on the proposed Transparency Act on extended country-by-country reporting expired on 2 August. The Act will require extraction companies to report on activities in respect of each country in which they operate, in order to contribute to more transparency about payment flows and prevent capital flight from poor, resource-rich countries.
Strong interests have been mobilised to curtail the company reporting requirements under the Act. It is a democratic problem if such interests are allowed to influence a necessary transparency reform. This may result in ineffective and inadequate legislation. Consequently, arguments against transparency should not be permitted to stand unchallenged.
*Arguments against transparency – and counterarguments against these*
The Norwegian Institute of Public Accountants is amongst the bodies that have presented arguments against transparency in various forums over the course of the two-year consultative process. The main arguments against the proposed legislation would appear to be that:
1. *_"It is important to closely examine the benefits from such reporting, and balance these against the costs"_*
Indirectly, the Norwegian Institute of Public Accountants is thereby casting doubt on the benefits and arguing that the costs associated with such reporting are high. This runs counter to the interests of large groups in society, such as investors, civil society, governments and the media, all of which will benefit considerably from such reporting. Extended country-by-country reporting can turn the annual financial statement into one of the most importance sources of information about a company.
The Norwegian Institute of Public Accountants has throughout been arguing that _"these are not accounting figures"_, and that such reporting is more appropriately characterised as involving a mix of "accrual variables and cash variables". The Institute has therefore been lobbying for a number of years to keep such reporting outside the financial statement. Such lobbying must have taken place against its better judgement, since the least costly reporting would be achieved by including it in a report which is already being prepared (the annual financial statement), and which is the first instrument consulted by anyone seeking information about a company.
Requiring reporting _outside_ the annual financial statement will result in such reporting being more costly, as well as less credible and accessible.
2. *_"Country-by-country reporting requirements should be introduced by way of an internationally coordinated effort, i.e. be the same in Norway as in the EU/EEA and also enter into effect on the same date"._*
This has its background in the recent focus on large international corporations that exploit loopholes in national tax systems to pay very little tax on the overall earnings from their activities. The EU Commission has therefore announced potential additions to the new EU Directive to include country-by-country reporting provisions. The Norwegian Institute of Public Accountants takes the view that it would therefore be inappropriate to enact specific Norwegian rules at present, out of step with those applicable in the EU/EEA.
This is misguided. Norway is a large and important country as far as extraction is concerned, leading the way as an example, but a small country as far as other economic activity is concerned. Norway can assume a pioneering role in an extraction context, whilst at the same time coordinating legislation pertaining to other industries with the EU. Moreover, Norway’s experience with rules for the extractive industries will be of use to the coming evaluation of the EU provisions.
In other words, the Norwegian Institute of Public Accountants is seeking to convey the impression of a clash of interests that does in fact not exist. We risk allowing the best to become the enemy of the good. We both could and should introduce expanded country-by-country for the extractive industries in Norway now, and let other country-by-country reporting be introduced in step with the EU.
3. *_"The information is difficult to get hold of"_*
This is asserted by both the extractive industries and the audit firms, but is at best a misunderstanding. A financial statement cannot include an ”ambivalent figure” for a country. If your production volume in a country is two million tonnes, then your production volume in that country is indeed two million tonnes. If a company has two different divisions or several legal entities in a country, all that is required is to add up their figures. For the vast majority of corporations this can be effected automatically without much extra work. The argument that this is «not all that simple» is therefore not viable.
Many considerations need to be taken into account when preparing a financial statement, but once this has been done the financial statement is consolidated and its profit/loss is ONE number. Extended country-by-country reporting will mean that the main variables in the annual financial statement (investments, production volumes, income, costs, taxes and the number of employees) are broken down and reported individually for each country included in the consolidated financial statement. It is, nonetheless, only ONE number per country.
*The interests of the few or the interests of the many*
Auditors have an important role to play in society: they are expected to contribute, through their services and their expertise, to strengthening confidence within society. It is, at the same time, a public fact that they have contributed to about half of the known instances of organised tax avoidance in countries like the UK.
Certain groups perceived as experts in the public debate have a strong self-interest in the matters discussed. The extractive industries represent an important client group for the four largest audit firms, which firms account for a predominant part of those used as experts by, inter alia, the media and governments, or others that may be expected to have considerable confidence in this group during a consultative process. It is therefore important to discuss what interests are promoted when we know which interest groupings work together. Such is especially the case when the subject matter is so complex that it is difficult for other players to interject.
*Better information*
The benefit from extended country-by-country reporting is that aggregate figures for a company are broken down at the country level and that tax payments are presented in context. This enables all countries to check the activities of a company. The more users of financial information are engaged in checking, and the more countries such users represent, the less likely that the remainder of the information is incorrect. This will provide statistics of considerably higher qualify for governments worldwide. Access to information will be improved for all users.
However, if other figures than accounting figures are reported, confidence in such reporting will be impaired. Separate reporting and separate verification will also make the introduction of said reporting more costly than necessary. Audit firms and law firms are amongst the groups that could specifically be expected to profit from this.
PWYP Norway would like to see the development of global financial reporting standards of a high quality, which are understandable, transparent and comparable, in the public interest. If the Norwegian Institute of Public Accountants is committed to performing its own role in society and serve broad social interests, it should support this effort.
A Transparency Act without transparency with regard to accounting figures sounds highly peculiar. It ought to sound especially peculiar to the Norwegian Institute of Public Accountants.
Foto: Paul Downey / Flickr