KPMG-SSH and The Sham Tax (Indonesia)

KPMG-SSHandTheShamTax 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 AM F A C U L T Y O F E C O N OM 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 DA

M u h a mm 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-SSHandTheShamTax


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ContentsOverview..............................................................................................................................................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


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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.

WhatActuallyHappened?

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


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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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SECTalkedOn 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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IkatanAkuntanIndonesiaReaction

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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BakerHughesIncorporated

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

Economy & Finance

KPMG-SSH and The Sham Tax (Indonesia)