The brokerage company was famous for a 1980s ad campaign, “When E.F. Hutton talks… people listen.” E.F. Hutton became famous for something else. It was complicated, it was company-wide, and it went on for three years, until they were found guilty of thousands of counts of fraud involving millions of dollars.
The fraud was for kiting.
A Special Type of Fraud
Check kiting is a type of bank fraud that occurs because banks and merchants extend credit on customer checks, when they don’t know whether the customer has enough funds in the other bank. Criminals could open two bank accounts, then write checks between them, covering each bad check with another bad check.
Journal entries are the backbone of accounting records. Despite the shift from quill pens to wi-fi chips, from clay tablets to vellum sheets to a blinking data entry screen, the accountants have always had to keep track.
Reducing Eggs Payable
Historians generally saw the ancient cuneiform notations as some of the earliest examples of writing–and accounting–in the world. The large-scale management of taxes, grain allotments, and army rations for the burgeoning Sumerian and Egyptian empires took a lot of tablets.
But local farmers had to keep track on their own, so researchers think that “primitive” bookkeeping, even based on barter, would have still included writing in a ledger. A neighbor might agree to take three chickens in exchange for a bag of seed when the harvest is completed. Or, suppose another neighbor made a sturdy cabinet for the kitchen in exchange for a year’s worth of eggs.
There would still need to be journal entries:
Bought one sack of seeds : Three chickens payable to Farmer Jones Bought one kitchen cabinet: Year’s supply of eggs to Farmer Kozlowski
Then, one of the kids had to be sent over every day to Kozlowski with the day’s supply of eggs, while someone would make the daily journal entry. Because if something happened to the parties in the transaction mid-year, Mrs. Kozlowski would want to know that she was still owed 183 eggs. On your books, that would be sitting as eggs payable.
“Leprechaun economics” is the term Nobel-prize winning economist Paul Krugman used. With all due respect to Ireland–that greenest land of wind, stories, and music to soothe the soul–their tax law sucks bilgewater.
The Republic of Ireland has managed, in the last fifty years, to transform itself into the world’s largest tax haven. Meaning a place that allows multinational corporations, particularly those formed and operating in the U.S., to use creative accounting to pay very little in taxes. How little? How about 0.005%?
Apple Chooses Between Single Malt or Double Irish
Apple is a company that has always thought far in advance about packaging and design–including on their financial statements. Back in 1980, about the time when they were prototyping the Macintosh, Apple opened a small office in Cork, Ireland, lured by a deal to pay no taxes for several years. Such local tax arrangements aren’t that unusual–Twitter moved into a derelict building in downtown San Francisco for the same “no tax for years” deal, while Delaware has long been known as a favorable legal and financial place for companies to incorporate.
What Apple was also able to do, over decades, was use its growing economic power to support an Irish shift into a myriad of favorable tax strategies–favorable to corporations, that is. A so-called Base Erosion and Profit Shifting (BEPS) plan allows companies to put their huge patents as giant assets on their balance sheets, in Irish subsidiaries. These patents, the stock and trade for tech companies, are amortized (charged out over time) in a convoluted way that allows the income received to be located in Ireland–with very low tax rates–even if it was earned somewhere else.