For more than a decade, tax gurus at PricewaterhouseCoopers helped Caterpillar Inc., the U.S. heavy equipment maker, move profits produced by its lucrative spare-parts business from the U.S. to a tiny subsidiary in Switzerland.

Little changed except the bookkeeping. Parts were still shipped from suppliers to a warehouse in Morton, Illinois, and then shipped from the warehouse to independent dealers. But the profits were booked by the Swiss subsidiary, which paid corporate taxes of less than 6 percent a year, far lower than Caterpillar’s 29 percent rate in the U.S.

By 2008, partners at the “Big 4” accounting firm worried the strategy might be threatened by Caterpillar’s decision to move some managers from Switzerland to the U.S., a shift that would underline the parts business’s small footprint in the mountain-peaked tax haven.

Thomas F. Quinn, a PricewaterhouseCoopers partner who helped design the tax-savings plan, wrote a PwC colleague that if they wanted to keep the strategy alive, they needed to “create a story” that “put some distance” between the managers and the spare-parts business.

“Get ready to do some dancing,” Quinn said.

The colleague, managing director Steven Williams, replied: “What the heck. We’ll all be retired when this … comes up on audit. … Baby boomers have their fun, and leave it to the kids to pay for it.”

This spring, U.S. Sen. Carl Levin blasted the email exchange and the profit-shifting strategy as exercises in the art of creating “unreality.” An investigation led by Levin revealed that the accounting firm exploited legal loopholes to help Caterpillar shuffle $8 billion in paper profits from America to Switzerland, reducing the equipment maker’s U.S. tax bill by $2.4 billion.   

The flare up over the Swiss strategy that PwC orchestrated for Caterpillar is among the latest in a series of investigations and legal clashes that shine light on the murky role that the world’s four largest audit firms — PwC, KPMG, Ernst & Young and Deloitte — play in the offshore financial system.

A review of court cases, government records and secret offshore files unearthed by the International Consortium of Investigative Journalists reveals that the Big 4 firms are central architects of the offshore system — and key players in an array of cross-border transactions that raise legal and ethical questions.

In Luxembourg, internal company documents reviewed by ICIJ show, PwC helped Pepsi, IKEA and other corporate giants from around the world embrace inventive profit-shifting strategies that allowed them to collectively slash their tax bills by billions of dollars.  

In the U.S., authorities charged, KPMG peddled offshore tax shelters that created billions of dollars in fake losses for rich clients, then misled the Internal Revenue Service about how the shelters worked.

In Dubai, anti-corruption advocates claim, Ernst & Young helped the Middle East’s largest gold refiner obscure practices that may violate international standards aimed at combatting trafficking in “conflict gold,” which comes from regions where competition for the mineral breeds bloodshed.

In New York, authorities charged, Deloitte helped a British bank violate sanctions against Iran, submitting a “watered-down” report to regulators that omitted information about how the bank might be evading money-laundering controls.

“These firms are supposed to be built on honor and integrity and being a watchdog, but they’re so big now it’s all about making money,” says Francine McKenna, an accountant who has worked for PwC and KMPG and now writes a blog, re: The Auditors, about big accounting firms’ misbehavior. “They’re not worried about reputation, because all of this stuff has not affected their ability to get bigger and bigger and bigger.”

Big 4 firms deny their practices are skewed by bottom-line considerations. Ernst & Young told ICIJ that it “operates strictly within the law and has exhaustive controls” that ensure it follows legal and regulatory rules. KPMG and PwC said they had strict codes of conduct for everyone working under their banners worldwide. Deloitte didn’t answer questions for this story, but has laid out its views in various public statements.

In cases when they’ve run into trouble, the Big 4 have generally blamed rogue employees or said that their actions have been misunderstood or taken out of context. During April’s Senate hearing on PwC’s work for Caterpillar, for example, Quinn said he’d made “a very poor choice of words” in his email exchange with Williams, and Williams said he’d made an inappropriate “attempt at humor.” A top PwC executive told Levin that the Swiss strategy designed by the firm was simply intended “to eliminate the unnecessary middleman.”

“We do not invent artificial business structures,” the executive testified.

Source: ICIJ