Montana Viewpoint

March 21, 2005

Last week I wrote about legislation to close loopholes in the corporate tax area. In the course of preparing to carry the Governor’s bill to curb such practices, I’ve had the good fortune to meet Mike Hamersley. Mr. Hamersley was the fellow who blew the whistle on KPMG, the giant accounting firm that has created and sold illegal tax avoidance schemes.

KPMG is one of the “Big Five” international accounting firms. That list once included the accounting firm called Arthur Anderson which was the outfit that helped Enron cook its books, creating an international financial scandal and economic disaster. Arthur Anderson isn’t around anymore.

Hamersley worked for KPMG from 1999 to 2002, and was on the fast track to becoming a partner of the company when he came face to face with a compelling ethical question: either enter into illegal tax avoidance schemes as his company demanded, or do the morally and ethically proper thing. To his great good credit, he went to the United States Congress to expose KPMG’s transgressions.

It should be no surprise that he no longer works for KPMG, nor will he ever again be hired by other accounting firms. In short, he sacrificed an extremely lucrative career so that he could live with his conscience. He now works for the California Franchise Tax Board—the corporate tax authority of California government.

Now, we are not just talking about run of the mill corporate tax loopholes here. We are talking about prestigious accounting firms who developed and marketed illegal methods by which their clients could avoid taxes.

According to Hamersley, KPMG, while conducting the audit of company finances for their clients, would secretly look for situations in the company finances that might lend themselves to tax avoidance schemes. KPMG then invented tax avoidance gimmicks, and marketed them to the pigeons they had just audited.

KPMG knew that the schemes were illegal under U. S. law, but did not tell the client this. In fact, they paid prestigious law firms to write “letters of opinion” saying that the schemes “should” pass muster with the Internal Revenue Service when they knew it was unlikely that they would. In fact, KPMG made sure that the penalties they would have to pay if caught were adequately covered by the fees they charged their clients for the tax avoidance scheme.

Here are excerpts from Hamersley’s testimony before the U. S. Senate Finance Committee:

“These abusive tax shelters also require a distortion or concealment of facts. They require not only intellectual dishonesty, but also deception, secrecy, and even conspiracy.”

“…the tax shelter promoters are well aware that many of the facts and representations concerned in the associated [legal] opinion letter…are false.”

These tax avoidance schemes, used by what are euphemistically called “high net worth individuals” (that means billionaires) and large companies, cost the citizens of the United States billions and billions of dollars annually. They cost the citizens of Montana, too.

In investigating a case in  California, the Montana Department of Revenue (DOR) found that a large company doing business in all 50 states had under-reported its income to the IRS by four—count ’em, four—billion dollars. That little omission cost the citizens of California $39 million in lost tax revenue. The Montana DOR figures that Montana is out about $860,000 to the same company.

Oh, by the way, California caught the company at it and got their money, but the company hasn’t volunteered to pay any other state what they are owed. They figure we’ll have to catch them first…which we just did.

The most disturbing and most important thing is not that we are being cheated out of tax dollars, says, Hamersley, but that it is the belief of most really big businesses that lying and cheating is OK. In fact, for their employees, it’s mandatory whether it’s OK or not.

Hamersley is here talking about the prevailing moral and ethical viewpoints of the world’s largest businesses being corrupt. Add to that the enormous influence that these businesses have on the United States Congress, and you can see the pickle we’re in.

The morality and ethics that you and I share are regarded as so much baloney by the most influential people in the world; that being a straight shooting citizen is for chumps like us. Just for an experiment, try treating your neighbor like that. You don’t need me to tell you you’ll lose a friend as well as a few teeth.

This is a bit more than just some lost tax revenue; this is about the potential loss of the social fabric that made America, and no one is more disappointed than Mike Hamersley.

Jim Elliott
Phone: 406-444-1556
Mail: State Senate Helena, MT 59620