draining development.pdf - Khazar University

Accounting for the Missing Billions 291Third, it is widely assumed that consolidated accounts and financialstatements are created by adding together all the accounts of the individualentities that make up the group and then eliminating all the intragrouptransactions and balances. This is a simplistic, but not whollyinappropriate view of what should happen. The reality is that MNCs candeliberately obscure the relationship between the underlying accountsand financial statements of the subsidiary companies and the groupaccounts in ways that make it almost impossible to detect what is reallyhappening within the group.The first method to achieve this is the use of different accountingyear-end dates for group companies. IAS 27 (section 26) says this shouldnot occur and that any differences should be explained, but the reality is(as the author has frequently witnessed) that noncoterminous year-endsare commonplace and almost never disclosed or commented upon. Ifnoncoterminous year-ends are used, transfer mispricing may then berelied on to shift profits (and losses) around the group almost at libertyand almost entirely undetected.Next, nonstandard accounting policies may be used in different placesto recognize transactions even though, according to IAS 27, this shouldnot occur. This is now commonplace. The parent company mightaccount using IFRSs, but local entities may well account using local GenerallyAccepted Accounting Principles, and there is nothing to preventthis. Some significant transactions have different tax treatments dependingon the accounting standards used. There are, for example, conflictsbetween the United Kingdom and the International Accounting Standardson financial derivatives for tax purposes. These differences andconflicts have been exploited by international banks.In addition, entries can be made in the consolidated accounts alone,without ever appearing anywhere in any of the accounts of the underlyingentities. In principle, this should not occur because the accounts canthen be said not to reflect the underlying books and records of the MNCthat is publishing them, but, in practice, if the entries are considered anonmaterial adjustment in the assessment from the point of view of theuser of the financial statements, which both the International AccountingStandards Board and the U.S. Federal Accounting Standards Boarddefine as “a provider of capital to the company,” then no auditor is likely