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KPMG-SSH and The Sham Tax (Indonesia)

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This paper explains about the scandal of PT Eastman Christensen (subsidiary company of Baker Hughes Incorporated) that involving KPMG-SSH.

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KPMG-SSH and The Sham Tax (Indonesia)

  1. 1. KPMG-SSH and The Sham Tax 1 I N T E R N A T I O N A L U N D E R G R A D U A T E P R O G R A M F A C U L T Y O F E C O N O M I C S A N D B U S I N E S S U N I V E R S I T A S G A D J A H M A D A M u h a m m a d H e i c k a l P r a d i n a n t a - 3 5 0 1 6 8 Z a n e F a u z i a h B a i t y - 3 4 4 1 4 4 KPMG-SSH and The Sham Tax
  2. 2. KPMG-SSH and The Sham Tax 2 Contents Overview .............................................................................................................................................. 3 What Actually Happened? ........................................................................................................ 3 SEC Talked ......................................................................................................................................... 5 Ikatan Akuntan Indonesia Reaction .................................................................................... 6 KPMG .................................................................................................................................................... 7 Baker Hughes Incorporated ...................................................................................................... 9 Attachment ....................................................................................................................................... 10 Foreign Corrupt Practices Act (FCPA) ................................................10 section 104 A (a) (1), (2) and (3) .........................................................10 Sections 30A (a) (1), (2) and (3) of Exchange Act ..............................11 References ........................................................................................................................................ 14
  3. 3. KPMG-SSH and The Sham Tax 3 Overview It was all started when KPMG-SSH in Indonesia did bribery to Indonesian tax official in order to reduce the tax assessment for their client, which is PT Eastman Christensen (“PTEC”) in 1999. PT Eastman Christensen is a private company that focuses on the industrial sector and this company majority-owned by Baker Hughes Incorporated, which is one of the world’s largest companies in the oil and gas sector that headquartered in Texas, United States. After KPMG-SSH did bribery, Indonesian tax official reduced the tax assessment for PT Eastman Christensen from US$ 3.2 million drops to US$270,000. What Actually Happened? In 1999 Baker Hughes Inc.’s CFO and Controller, Eric Mattson and James Harris authorized its subsidiary PT. Eastman Christensen to decrease and avoid tax from USD 3.2 Million to USD 270,000. In order to smooth their way in reducing tax, PT Eastman Christensen continued that order by doing bribery to the tax officer for $75,000. The tax officer then continued the request by accepting to get rid of the tax in the amount of $3 million. Therefore, PT Eastman Christensen only needed to pay the $270,000. On the other hand, this practice was not purely done by PT Eastman Christensen only, but there was an Indonesian public accounting firm, which had a role as the invisible hand to help with the red tape regarding tax administration in Indonesia. The most surprising news came from the reputation of this public accounting firm which has really high
  4. 4. KPMG-SSH and The Sham Tax 4 credibility, as the fact that it belongs to the big four public accounting firms. It was KPMG-Sidharta Sidharta & Harsono (“SSH”) who has bravery to do the unethical things that can risk their future career. To conceal the improper payment, Harsono agreed with KPMG-SSH personnel that KPMG-SSH should generate an invoice that would include money for the payment to the Indonesian tax official and for KPMG-SSH's fees for services rendered.1 KPMG-SSH input the bribery money as a part of their invoice given to PT Eastman Christensen for using their delusive service. The total of the invoice is approximately $143,000 consist of $75,000 as the douceur money and $68,000 as the real payment of their service. Several days after the transaction, it felt like magic because their tax decreases exactly $3 million. This victory stood only for several weeks. Their anti-bribery adviser said if the action of decreasing tax illegally is known by their outer circle or public, it would threat company’s future. In the other hand, the company was ordered to cease and desist from committing or causing future books and records violations by keeping books, records, or accounts with sufficient detail that truly represented the transaction. By considering the reasons given, Baker Hughes voluntarily reports their own action to Security Exchange Commission, they also fired the executives who involve.
  5. 5. KPMG-SSH and The Sham Tax 5 SEC Talked On September 11, 2001, the Securities and Exchange Commission and the United States Department of Justice filed a joint civil injunctive action in the United States District Court for the Southern District of Texas, Houston Division, against KPMG-SSH, a public accounting firm in Jakarta, Indonesia and Sonny Harsono ("Harsono"), a partner of KPMG-SSH. The complaint is about the bribery mentioned and SEC announced that Baker Hughes suspected for doing business against Foreign Corrupt Practices Act (FCPA) in the section 104 A (a) (1), (2) and (3)2 and sections 30A (a) (1), (2) and (3), 13 (b) (2) (A) and 13 (b) (2) (B) of the Exchange Act.3 In KPMG sides, they prefer not to admit or deny their practice and it causes the final judgment accused them for violates the same section in FCPA and SEC mentioned for Baker Hughes. Finally, both parties have sanction consented to a cease-and-desist order that forbids future violations of the internal controls and books and records provisions of the Exchange Act, but was not subject to a financial penalty4
  6. 6. KPMG-SSH and The Sham Tax 6 Ikatan Akuntan Indonesia Reaction Response to the violence done by Indonesian public accounting firm, IAI’s board of honor, Erry Riyana Hardjapamekas said, “It should not be happened. KPMG actually have known and mastered about accounting codes of conduct for professional accountant, but if we look at the reality in Indonesia, the values of accounting codes of conduct mischaracterized which led to the changing of the values”5 On the other hand, IAI thought that KPMG misinterpreted the meaning of customer service. Customer service not always fulfills what the client want, the interest of the client, but being a public accountant also need to consider about rules, policy and accounting codes of conduct. The public accounting firm should also be able to balance between public and client interest. KPMG-SSH also should be more aware about the differences between between tax avoidance and tax efficiency. IAI also said that they can do nothing because there are no any report to investigate about the bribery tax. If they want to open this case, they should report first, then IAI will hold an investigation.
  7. 7. KPMG-SSH and The Sham Tax 7 KPMG KPMG is an international service company, which located in Amstelveen, Amsterdam. KPMG has some kinds of service that they offer such as audit, tax, advisory and others (Global China Practice, IT Risk Advisory). In this company, they employ more than 162.000 employees that spread to 155 countries including Indonesia.6 KPMG was a member in the big eight auditors in 1989 with the name of Peat Marwick Mitchell and the rest members were Arthur Andersen, Arthur Young & Company, Coopers & Lybrand, Ernst & Whinney, Deloitte Haskins & Sells, Price Waterhouse and Touche Ross. Because of Ernst Whinney merged with Arthur young became Ernst and Young and also the establishment of Deloitte and Touche, which originated from Haskins & Sells merged with Touche Ross on August 1989, then it changed from big eight to big six in the period of June 1989 until 19987 and then KPMG still included in The big five auditors on July 1998. This change happened due to Price Waterhouse merge with Coopers & Lybrand became PricewaterhouseCoopers. And from the period 2002 until now, this big five has changed to big four because Enron scandal which involving Arthur Andersen in 2002. And now, the members of Big Four are Ernst & Young (EY), Deloitte Touche Tohmatsu, KPMG and PricewaterhouseCoopers (PwC).8 In order to expand the global network, KPMG also cooperated with local partner in Indonesia named Public Accountant Firm of Siddharta Widjaja & Rekan, which is led by Tohana Widjaja. KPMG Indonesia gives some kind of services, such as Audit services, Tax services and Advisory services. In audit services, KPMG
  8. 8. KPMG-SSH and The Sham Tax 8 cooperated with Siddharta Widjaja & Rekan that was founded by Drs. Basuki T. Siddharta in 1957. This registered public accounting firm is included in one of the first accounting firm that established in Indonesia. Basically, this audit department provides an audit service to assess information that prepared by client for use by creditors, investors and other users. For instance, they provide financial statement audit services by giving perspective to improve client’s financial processes, risk management, etc. timely reporting, business orientation and also attestation services. Currently, the partner in charge of KPMG’s Audit services is Mrs. Kusumaningsih Angkawidjaja. The second one is Tax department. In tax services, KPMG has KPMG Advisory Indonesia, which was established in 2002. Currently, the managing partner of tax services is Mr. Abraham Pierre. KPMG Advisory Indonesia provides business advisory services, especially on taxation and some business related issues. Examples of their services are Corporate and Business tax services; it will help their client to plan strategy for developing the tax-effective, Indirect tax services, transfer pricing services, global mobility services, merger & acquisition services and many more services. And the last one is Advisory department. This department named KPMG Siddharta Advisory, which led by Mr. Ho Wah Lee as Head of Advisory.9 So in this department, KPMG Siddharta Advisory offers some kinds of services such as Management consulting, Risk consulting, and Deal consulting. In management consulting, they provide services to improve the performance of the business such as Strategy and business planning, change management, revenue assurance, sourcing advisory, etc. For risk consulting, they offer like enterprise risk management, financial risk management, internal audit & controls, etc. and for the last part of consulting services, Deal consulting, in this part, they offer their ideas and experience for clients to take advantage of opportunities such as how to get good opportunities at the right price, advantage and disadvantage if the client wants to merger or acquisition, etc.
  9. 9. KPMG-SSH and The Sham Tax 9 Baker Hughes Incorporated Baker Hughes Incorporated is one of the world’s largest companies focusing on oil and gas, which has headquarters in American General Center, located in Neartown Houston, Texas. Baker Hughes was established by merging of Baker International and Hughes Tool Company in 1987. Both companies founded more than 100 years ago, in 1907, Reuben C. Baker developed a casing shoe for cable tool drilling and he also established Baker International. 2 years later, on August 10, 1909, Howard Hudges got his patent for the rotary drill after he applied of his invention on November 20, 1908. The patents are U.S. Patent 930,758 and U.S. Patent 930,759 and also he established Hughes Tool Company, which named as Sharp-Hughes Tool Company at that time.10 During the decades, both companies compete to make innovative products, drilling tools and other services that related to their businesses. Currently, Baker Hudges Incorporated employs over 46.000 employees that spread to more than 80 countries. They classified into 2 different divisions based on their expertise such as Drilling and Evaluation Group and Completion and Production Group. Drilling and Evaluation Group includes Hughes Christensen, Baker Atlas, Baker Hughes Drilling Fluids, and Baker Hughes INTEQ.11 The second division that is Completion and Production Group includes Baker Oil Tools (BOT), Baker Petrolite, and Centrilift. In 2009, Baker Hudges adopted a new system to their business model by classified the companies that have been acquired and integrated by Baker Hudges into
  10. 10. KPMG-SSH and The Sham Tax 10 several segments such as Drilling, Evaluation and Fluids, Completion, Production and Chemicals, Pressure pumping, and Reservoir Development Services.12 Attachment Attachment 1 Foreign Corrupt Practices Act (FCPA) Section 104 A (a) (1), (2) and (3)2 104A. PROHIBITED FOREIGN TRADE PRACTICES BY PERSONS OTHER THAN ISSUERS OR DOMESTIC CONCERNS. A (a) PROHIBITION. — It shall be unlawful for any person other than an issuer that is subject to section 30A of the Securities Exchange Act of 1934 or a domestic concern (as defined in section 104 of this Act), or for any officer, director, employee, or agent of such person or any stockholder thereof acting on behalf of such person, while in the territory of the United States, corruptly to make use of the mails or any means or instrumentality of interstate commerce or to do any other act in furtherance of an offer, payment, promise to pay, or authorization of the payment of any money, or offer, gift, promise to give, or authorization of the giving of anything of value to— A (1). Any foreign official for purposes of C A(A)(i) influencing any act or decision of such foreign official in his official capacity, (ii) inducing such foreign official to do or omit to do any act in violation of the lawful duty of such official, or (iii) securing any improper advantage; or A(B) inducing such foreign official to use his influence with a foreign government or instrumentality thereof to affect or influence any act or decision of such government or instrumentality, A in order to assist such person in obtaining or retaining business for or with, or directing business to, any person;
  11. 11. KPMG-SSH and The Sham Tax 11 A (2). Any foreign political party or official thereof or any candidate for foreign political office for purposes of-- A (A)(i) influencing any act or decision of such party, official, or candidate in its or his official capacity, (ii) inducing such party, official, or candidate to do or omit to do an act in violation of the lawful duty of such party, official, or candidate, or (iii) securing any improper advantage; or A (B) inducing such party, official, or candidate to use its or his influence with a foreign government or instrumentality thereof to affect or influence any act or decision of such government or instrumentality, A in order to assist such person in obtaining or retaining business for or with, or directing business to, any person; or A(3). Any person, while knowing that all or a portion of such money or thing of value will be offered, given, or promised, directly or indirectly, to any foreign official, to any foreign political party or official thereof, or to any candidate for foreign political office, for purposes of— Attachment 2 Sections 30A (a) (1), (2) and (3) of Exchange Act3 30A - Prohibited Foreign Trade Practices by Issuers (a) Prohibition It shall be unlawful for any issuer which has a class of securities registered pursuant to section 78l of this title or which is required to file reports under section 78o(d) of this title, or for any officer, director, employee, or agent of such issuer or any stockholder thereof acting on behalf of such issuer, to make use of the mails or any means or instrumentality of interstate commerce corruptly in furtherance of an offer, payment, promise to pay, or authorization of the payment of any money, or offer, gift, promise to give, or authorization of the giving of anything of value to— (1) Any foreign official for purposes of— (A)(i) influencing any act or decision of such foreign official in his official capacity, (ii) inducing
  12. 12. KPMG-SSH and The Sham Tax 12 such foreign official to do or omit to do any act in violation of the lawful duty of such official, or (iii) securing any improper advantage; or (B) inducing such foreign official to use his influence with a foreign government or instrumentality thereof to affect or influence any act or decision of such government or instrumentality, in order to assist such issuer in obtaining or retaining business for or with, or directing business to, any person; (2) Any foreign political party or official thereof or any candidate for foreign political office for purposes of— (A)(i) influencing any act or decision of such party, official, or candidate in its or his official capacity, (ii) inducing such party, official, or candidate to do or omit to do an act in violation of the lawful duty of such party, official, or candidate, or (iii) securing any improper advantage; or (B) inducing such party, official, or candidate to use its or his influence with a foreign government or instrumentality thereof to affect or influence any act or decision of such government or instrumentality, (3) In order to assist such issuer in obtaining or retaining business for or with, or directing business to, any person; or (3) any person, while knowing that all or a portion of such money or thing of value will be offered, given, or promised, directly or indirectly, to any foreign official, to any foreign political party or official thereof, or to any candidate for foreign political office, for purposes of— (A)(i) influencing any act or decision of such foreign official, political party, party official, or candidate in his or its official capacity, (ii) inducing such foreign official, political party, party official, or candidate to do or omit to do any act in violation of the lawful duty of such foreign official, political party, party official, or candidate, or (iii) securing any improper advantage; or (B) inducing such foreign official, political party, party official, or candidate to use his or its influence with a foreign government or instrumentality thereof to affect or influence any act or decision of such government or instrumentality, in order to
  13. 13. KPMG-SSH and The Sham Tax 13 assist such issuer in obtaining or retaining business for or with, or directing business to, any person. Section 13 (b) (2) (A) and 13 (b) (2) (B) of Exchange Act3 13 (b) 2. Every issuer which has a class of securities registered pursuant to section 12 of this title and every issuer which is required to file reports pursuant to section 15(d) of this title shall— (A) Make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer; (B) Devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that— I. Transactions are executed in accordance with management’s general or specific authorization; II. Transactions are recorded as necessary (I) To permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and (II) To maintain accountability for assets; (III) Access to assets is permitted only in accordance with management’s general or specific authorization; and (IV) The recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences
  14. 14. KPMG-SSH and The Sham Tax 14 References 1. Department of Justice United States of America https://www.traceinternational2.org/compendium/view.asp?id=5 2. Anti-Bribery SEC https://www.sec.gov/spotlight/fcpa/fcpa-anti-bribery.pdf 3. Foreign Corruption Practice Act http://www.justice.gov/sites/default/files/criminal- fraud/legacy/2012/11/14/antibribe.pdf 4. Penalty for KPMG and Baker Hughes http://star.worldbank.org/corruption-cases/node/19831 5. IAI’s statement http://www.hukumonline.com/berita/baca/hol3732/font-size1- colorff0000bskandal-penyuapan-pajakbfontbr-kantor-akuntan-kpmg- indonesia-digugat-di-as 6. KPMG Profile http://www.kpmg.com/id/en/about/Pages/default.aspx 7. https://en.wikipedia.org/wiki/KPMG 8. https://www.kpmgenterprise.co.uk 9. http://www.cbc.ca/news/business/kpmg-tax-sham-used-by-at-least-25- wealthy-canadians-document-says-1.3249468 10. Baker Hughes Profile http://www.bakerhughes.com/company/about/history 11. https://en.wikipedia.org/wiki/Baker_Hughes 12. www.bakerhughes.com

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