The Ministry of Finance is expected to imminently publish its proposal for a Transparency Act governing ”extended country-by-country reporting”. This will require the Government to take a view on whether the general public shall get access to the real accounting figures requested, or to an alternative set of figures of unknown provenance.
The article Choose transparency written by sec. gen. Mona Thowsen in PWYP Norway and published in the “Dagsavisen” newspaper on 2 September 2013.
If the latter is chosen, it will be difficult to have confidence in the information and the implementation of disclosure will be more expensive than necessary.
Running the risk of a Transparency Act without transparency
Ministry of Finance’s consultative round on the Transparency Act governing extended countr yby country reporting has been completed. Publication of the proposed legislation may be imminent, as the Minister of Finance has promised that the provisions shall enter into force on 1 January 2014.
The intention behind the legislation is to show where the cash flows from trading in natural resources are channelled. PWYP Norway is of the view that eight accounting figures disclosed in notes to the annual financial statement is all it takes to show where the cash flows are channelled. The logical and most effective source of financial information is the financial statement of a company.
The problem is that the Ministry of Finance appears to be basing its legislative proposal on the preferences of the oil industry, which is opposed to the disclosure of real accounting figures Statoil , the NOrwegian Institute of Public Accounts and the Ministry of Petroleum and Energy are resisting any linkage between the reporting and the financial statement.
*Use of the term ”reconciliation” may topple the Transparency Act
In the legislative proposal circulated for comments, the Ministry of Finance refers to Publish What You Pay Norway’s proposal for extended country-by-country reporting. It argues that PWYP Norway is recommending ”reconciliation against the annual financial statement”.
Use of the term ”reconciliation” may seem fairly innocuous, but will have a monumental impact on what figures are going to be presented to the general public. Choosing the wording ”reconciliation against annual financial statement” introduces a terminology that would allow figures of unknown provenance to be reported and thereafter «reconciled» against the financial statement.
We therefore wrote a letter to the Ministry of Finance with the title clarification of terminology , highlighting that PWYP Norway’s proposal does not involve reconciliation.
The significance of a technical misunderstanding or misinterpretation, whether intentional or not, is that it makes it possible to block disclosure to the general public of the eight accounting figures requested under the Transparency Act. The risk is that the general public will be presented with a glossy promotional pamphlet containing those figures that the oil companies would like the general public to see.
*Eight accounting figures in notes to the annual financial statement
The most appropriate, inexpensive and straightforward solution is to require companies to disclose eight accounting figures for each country in which they operate, reporting these in notes to the annual financial statement.
In order for tax loopholes to be closed, it is necessary to first break down five accounting figures on a country-by-country basis:
- Investments, production volumes, income, costs (purchases of goods and services, wages and other operating costs) and taxes are all accounting figures
In addition, companies are required to report actual taxes paid, i.e. a cash variable comprised of three accounting variables:
- Tax liabilities payable 1 January + taxes payable in the income statement – tax liabilities payable 31 December.
This will be in conformity with what the group auditors have audited in connection with consolidation, because these figures will already have been audited. In other words, the sum total of all countries plus intra-group adjustments will automatically match the main figures from the consolidated financial statement. Hence, there is no need for costly auditing or time-consuming supplementary reporting.
This offers numerous benefits
- It will enable those who have invested in a company to keep track of the dealings of that company, and to pose critical questions as to why they do not receive funds tied down in tax havens. If investors follow up companies more closely, it will put pressure on companies to act more appropriately, which will also benefit developing countries.
- When companies disclose accounting figures on a country-by-country basis, all countries will be able to check the information thus disclosed. The more countries are checking that the figures are correct, the more likely that such figures will also be correct for developing countries that may themselves have limited capacity to verify figures. This is a unique concept in a development context.
- It will contribute to improved statistics worldwide, for the benefit of governments, researchers and others.
- The media will be able to follow up individual companies more closely and pose more critical questions with regard to the dealings of companies in various countries, or to pose more critical questions to countries themselves.
- Civil society can keep better track of both companies and governments, thus contributing to improved processes in individual countries, based on commonly accepted figures instead on heated discussions concerning the correctness of information.
- Parliaments worldwide can improve their legislative basis through the information disclosed.
Why, yes, these are indeed accounting figures
However, strong forces with vested interests are seeking to dilute the Act by alleging that the eight accounting variables do not represent accounting figures. The subject matter is sufficiently complex and convoluted to make it difficult for others to refute such allegations. It is therefore important to ensure that the said allegations do not stand unchallenged. Why, yes, all of these figures are indeed accounting variables. The key insight is that the accrual principle and the cash principle are not unrelated to each other. The cash variable tax (i.e. tax liabilities 1 January + taxes for the year in the income statement – tax liabilities 31 December) is related to the accounting variables pertaining to tax. Hence, the only appropriate approach is to link taxes paid to the consolidated financial statement. These figures are linked, without any additional auditing being required.
It can obviously be disagreeable to get the accounting figures into the open if much effort has been devoted to manipulating figures across countries by using e.g. tax havens. Decoupling such reporting from the financial statement may, incidentally, be a financial boon for the auditing industry if additional auditing is required. However: The Transparency Act is not intended to protect the right to keep figures concealed (the extraction companies) or the right to grant oneself financial benefits through an increased demand for one’s services (the auditing industry).
An effective Transparency Act in Norway would generate a unique body of experience and be of importance when the EU is going to review its minimum standard in three years. An effective Transparency Act would create a level playing field. This would mean that the worst-offending companies are no longer permitted to define the transparency standard.
PWYP Norway is requesting the Government to ensure that the Transparency Act governing ”extended country-by-country reporting” is based on the eight accounting figures sought by the general public and that these be presented in the form of notes to the consolidated financial statement.