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
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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. KPMG-SSH and The Sham Tax
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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. KPMG-SSH and The Sham Tax
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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.
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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
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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.
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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
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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.
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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
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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;
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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
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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
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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
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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
