In 2017, Caterpillar Inc, a company that makes construction and mining equipment, was found guilty of tax evasion. Government investigators were closely following the company after a 2014 Senate hearing revealed that Caterpillar cut its tax bill by $2.4 billion over a 13-year period. The company achieved this by moving earnings offshore. As reported in the New York Times, “The 2014 Senate report on Caterpillar said the company worked with the accounting firm PricewaterhouseCoopers, to set up its Swiss tax-cutting strategy. PwC was also the company’s auditor, which raised “significant conflict of interest concerns,” according to Senate investigators.” The, United States Government Securities and Exchange Commission, commonly known as the SEC, are against Caterpillar’s use of offshore accounts because moving earnings offshore has helped Caterpillar avoiding taxation and to show higher earnings, than they would have by keeping the earning in the United States.
The operation was intended to avoid being taxed on earnings of $7.9billion. Although the Caterpillar’s offshore tax avoidance accounting practices are frowned upon, they are not illegal if done correctly. And, not uncommon among major companies however, in a New York Time article by Jesse Drucker, he states “companies like Caterpillar, Google, Apple, and Pfizer have accumulated over $3.2 trillion in offshore subsidiaries.” Having offshore accounts is not illegal, as long as the company reports it. United States citizens are now taxed on worldwide income, which means that it can only go untaxed, if it is not reported. If the income is reported then the practice is completely legal, however some people do not report it truthfully, therefore they commit tax evasion. In addition to the risk of potential tax evasion, offshore accounts are generally too expensive for most people so most of the offshore account holders are generally wealthy.
A Bloomberg Business article by Bryan Gruley, explains that then-Chief Executive Officer Jim Owens said, “He slept well because he couldn’t imagine Caterpillar was experiencing the sort of ethical lapse that had doomed Enron Corporation.” The Caterpillar scandal grew into a much bigger problem than anyone at Caterpillar thought it would have. At the time Caterpillar accountant, Daniel Schlicksup who worked at Caterpillar for 16 years, refuted the accounting practices that the company took part in. When he saw that he had unknowingly helped the company avoid over a billion dollars in taxes, he went to at the time CEO Jim Owens. He sent Jim Owens an email with the title “ethics important to you, the board and Cat shareholders”. In retaliation to Schlicksup threatening to whistle-blow, Caterpillar made his life unbearable by taking away his God given rights such as only being allowed to eat lunch outside of the company building with written permission.
Eventually, Schlicksup blew the whistle on Caterpillar and followed through with his accusations. He even went to the stand to explain what Caterpillar put him through and the troubles him and his family suffered. In March 2017, federal agents raided Caterpillars headquarters with warrant to search the building. The federal agents were looking for evidence. The court eventually found the accusations to be true and rewarded Schlicksup with upwards of five hundred million dollars.
This entire scandal could have been completely avoided if there was a third party involved. If a compliance officer were keeping up on Caterpillar’s book keeping and general journal there would not have been any tax evasion. However, Caterpillar was greedy with their revenue and wanted to try to cheat the system and was caught. The only person that decided to face the large company was Daniel Schlicksup who previously was mentioned for the giant reward he received. Even though Schlicksup did end up with a fortune from his decision to whistle blow and announce to the entire country what Caterpillar did. He did not do it for the money, instead he realized what they were doing was not right and he was not going to let them get away with it. Without Schlicksup’s ethical thinking, Caterpillar might never have been exposed and could have kept their creative accounting secrets to himself. The CEO at the time was fine with what the accountants were doing and he even talked about sleeping well while it was happening.
To me the penalty for Caterpillar was a major blow to them as a company. They were completely stripped of all the off shore money and were forced to give Daniel Schlicksup, the person that blew the whistle on them gained, 15-30% of the money that they lost to the IRS. In addition to the accounting charges, Caterpillar is being investigated for sale of equipment to countries such as Syria, Sudan, and Iran, which is a major red flag to any company based in the United States. To prevent scandals similar to this one to happening again, the government is making changes. According to Business Insider’s Akin Oyedele, “President Donald Trump has proposed that companies with large stashes of overseas cash be able to return them at a 10% rate.” This would encourage companies to keep their money in the United States and not have to turn to oversea accounts. In addition to companies bringing in more money in the country, there would not be any reason to try to do creative accounting because the financial gain is not as great. That being said, Caterpillar’s work ethics are flawed and need to be turned inside out if the company wants to survive.