More Trouble With Our Dickie...

Well, it seems our favorite dim-bulb progressive Euroweenie chartered accountant - that being Richard ("Our Dickie") Murphy, of course - has decided that, based on their operating results for the year ended November 28, 2008, evil capitalist financial giant Goldman Sachs has shown "contempt for the state by avoiding their obligation to pay tax". This despite the fact that Our Dickie clearly hasn't the faintest idea of how much tax (if any) Goldman Sachs was required to pay during the year.

Stupid, silly bastard.

It seems Our Dickie has given Goldman Sachs' Form 8-K a bit of a going over and decided that, irrespective of what various and sundry taxing authorities might have to say about the matter, Goldman Sachs isn't paying enough tax.

Here's the part of the Form 8-K that Our Dickie presents to bolster his case (click on it and you'll get a larger version):

Here's what Our Dickie has to say about that:

There’s a line to note: provisions for taxes. $6,005 million in 2007, $14 million in 2008. The  2007 result shows that most of that $6,005m was current tax.

Sure, profit went down by 86% but taxes fell by more than 99%. The effective declared tax rate fell from 34% to 0.6%.

There’s an explanation in the 8K:

The effective income tax rate was approximately 1% for 2008, down from 25.1% for the first nine months of 2008 and down from 34.1% for fiscal 2007. The decreases in the effective income tax rate were primarily due an increase in premanent benefits as a percentage of lower earnings and changes in geographic earnings mix.

OK, so what do we have here? Goldman Sachs is paying less tax in 2008 than 2007? Maybe, but you surely can't tell that from looking at the line labelled "Provision for taxes", as Our Dickie should well know... but doesn't. Our Dickie continues:

GS has had a $6 billion bail out from the US government. This is how it responds.

The messages are unambiguous: first of all we need country by country reporting. It is absurd that a company can say that it has reduced its tax liability as a result of a change in its geographic earnings mix and not explain precisely where those earnings have moved to and why the change in such a key variable has been so dramatic as a consequence.

Second, it is wholly unacceptable that at a time when banks are utterly dependent upon the state for the provision of their equity that they should show such contempt for the state by avoiding their obligation to pay tax.

The time for change has arrived. We are all equity holders in these enterprises now, whether in the USA or not. Businesses have to account to the world’s population wherever they are for what they do in whichever place they locate.

Yeah, workers of the world unite! Or whatever.

It's bad enough that Our Dickie doesn't understand the function of an audit, but now he's managed to demonstrate that he doesn't understand undergraduate level accounting.

The "Provision for taxes" (income tax expense) does not show (oddly enough) what Goldman Sachs will actually pay in taxes for fiscal year 2008. Nor does it show what Goldman Sachs actually paid in 2007. To come up with those numbers, you'd have to aggregate the tax returns filed and taxes paid. That's not how you calculate income tax expense under generally accepted accounting principles. Here's an explanation from FASB Statement 109, Accounting for Income Taxes:

The objective of accounting for income taxes are to recognize (a) the amount of taxes payable or refundable for the current year and (b) deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an enterprise's financial statements or tax returns.

A rough translation, courtesy o' Dennis, reads like this:

You don't just write down the amount of income tax you paid and call it a day. You calculate your provision for income taxes using the operating results arrived at under generally accepted accounting principles. That's the number that shows up on the financial statements.

You see, tax law and GAAP accounting don't always mesh. In fact, they rarely mesh. For example, I have a client who is a rather successful building subcontractor. Using generally accepted accounting principles to calculate his income, I would arrive at a figure somewhat north of $350,000 for 2008. My client doesn't want to pay taxes on that $350,000 any sooner than is required by law. To facilitate nirvana, I have elected that the company be a cash basis taxpaying entity (as opposed to using the accrual basis accounting required by GAAP). In addition, I will be electing to expense large amounts of my client's equipment purchases using Section 179 (which is not GAAP). End result? My client will end up paying tax in 2008 on roughly $35,000 of income. The estimated tax on the difference of $315,000 is a deferred tax liability. When the tax is paid (in later years), the liability goes away.

So, if my client's company was reporting its operating results via a Form 8-K, it would show a "Provision for taxes" based on the tax that would be paid on $350,000, not the actual tax paid on $35,000. I won't argue that it seems silly to do so, but theoretical consistency demands it. In any event, the point here is simple: Looking at the tax expense recorded in GAAP basis financial statements will not tell anything about a company's actual tax expense. And just so we're clear about this, every accounting major graduating from college in the United States of America has been exposed to this.

Every last one.

And you know what? If Richard Murphy is going to sit around boviating about the violence inherent in the system, he should take the time to gain an understanding of what he's going on about. The bottom line is this: Richard Murphy hasn't the faintest idea of what Goldman Sachs has paid or is going to pay in taxes. And if Richard Murphy is going to hold himself out as an expert in taxation in accounting, it'd help if he would demonstrate a level of accounting knowledge befitting a junior in college.

So to wrap up, let's look at Our Dickie's screed point-by-point:

Fact the First: Our Dickie doesn't understand generally accepted accounting principles. Nor does he understand the concept of "book-to-tax" differences. All of which is Accounting 101 stuff.

Fact the Second: Our Dickie doesn't have the faintest idea of what Goldman Sachs pays in income taxes. Actually, that's not quite true: He has a completely wrong idea of what Goldman Sachs pays in taxes.

Fact the Third: Our Dickie identifies the changing geographical mix of income earned as the key component in Goldman's lower 2008 tax expense. Our Dickie has no way of knowing that one way or the other, having clearly ignored one key component of the explanation provided on the 8-K.

Fact the Fourth: Country-by-country reporting doesn't change the amount of income tax expense presented in GAAP-basis financial statements. Evidently Our Dickie was having a bit of an episode about tax havens when he wrote that. In his world, everything comes back to tax havens.

Fact the Fifth: Our Dickie thinks companies have an obligation to pay taxes even when not required to do so by prevailing tax laws. This is, once again, Our Dickie's very egalitarian nature asserting itself. Goldman Sachs isn't illegally avoiding taxes, they just aren't paying enough to satisfy Our Dickie. Ergo, Goldman Sachs is showing " contempt for the state by avoiding their obligation to pay tax".

All I can say is this: Richard Murphy is the Amanda Marcotte of accounting, and his analysis of Goldman Sachs' taxes proves it.

Comments

[markg8]

So if I go by the example of your subcontractor client does that mean Goldman didn't wind up paying squat in taxes last year and will pay even less this year?

Somehow I don't think having that explained to him is going to make Murphy happier.

[Dan from Madison]

The Amanda Marcotte of anything = ouch.

[BlacquesJacquesShellacques]

Dickie does say "The 2007 result shows that most of that $6,005m was current tax." and links to the entire GS annual report. If I were to read that annual report, could I calculate whether most of the $6,005 was in fact current tax? If so, is Dickie correct?

I commented thusly on Dickie`s post:

`Dennis the peasant says you're an idiot. http://dennisthepeasant.typepad.com/dennis_the_peasant/2008/12/more-trouble-with-our-dickie.html

Any response?`

Dickie often refuses my comments.

[Dennis The Peasant]

BJS-

Really?

[PALGOLAK]

Que?

[PeterUK]

"Yeah, wankers of the world unite! Or whatever."