Glossary Item

The accounts of a reporting entity reflect the transactions which it undertakes with those people and entities that are external to it. Those accounts do largely reflect the value of transactions as goods, services and money move across the boundary of that reporting entity i.e. accounts record the value of these as they move into or out of its control.

If a reporting entity controls other reporting entities, then it is referred to as a parent entity or group. It does then not only prepare accounts for its own transactions but also prepares what are called consolidated accounts or group accounts for the group as a whole.

Group or consolidated accounts are designed so that all the transactions between group companies are cancelled out and what remain are the sales and purchases, assets and liabilities arising from transactions with third parties external to the group as a whole.

The supposed purpose of group accounts is to show the total resources and trading under the control of the directors of the group parent company for the benefit of its shareholders, who are (as is usual under all  commonplace accounting standards) assumed to be the only stakeholder  with an interest in those accounts or financial statements.

There are substantial problems with this assumption and with the resulting group or consolidated financial statements. Firstly, the accounts are not prepared to provide information to five major stakeholder groups with an interest in them:

1. Customers and suppliers
2. Employees
3. Regulators
4. Tax authorities
5. Civil society in all its forms.

They are, as a result, designed to be deficient.

Secondly, the group accounts rarely disclose information on:

1. Where the group trades with indicators of scale (sales, number of employees, employee cost, profit and net assets invested) by location
2. Which companies make up the group; only the larger ones often being disclosed
3. The scale of intra-group trading when it is this intra-group trading that is frequently used to misallocate profits between jurisdictions to achieve a tax saving by abusing arm's length pricing rules established by the OECD (see separate entries for all these issues)
4. Tax haven activity is rarely if ever disclosed adequately
5. Tax paid is rarely disclosed by country.

Country-by-country reporting was created to tackle these deficiencies but has yet to receive endorsement by any major accounting standards setter (although Australia is moving in that direction) and despite the fact that it has been required for tax purposes by most major tax authorities since 2015.

There is also a commonplace problem within many group accounts where the parent company often prepares its accounts using local generally accepted accounting principles  whilst the group prepares its accounts using International Financial Reporting Standards. The resulting differences in presentation are frequently used as a basis for arbitrage  so that higher profits are declared in the group parent company accounts than for the group as a whole, allowing higher dividends to be paid than the group can seemingly afford.

Because auditors have been willing to declare the accounts of group companies including all these deficiencies as true and fair their own professional reputation has been declining throughout this century.

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