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But you don't need to police the mercenary accountants who construct tax shelters, as long as you police the auditors who sign off on the cash flow statement. Then you can work from first principles based on the cash flow. Any disagreement may be resolved by telling the firm that their tax lawyers are too aggressive. And that if they persist in their disagreement, they are welcome to a highly public court case that will splash their effective tax rate all over the front pages.

But this requires a truthful and reasonably accurate picture of the cash flow, which is why you have to police the auditors that audit the cash flow statements.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Apr 25th, 2011 at 07:05:55 AM EST
[ Parent ]
But cash flow in cash, without invoices, is almost by definition impossible to audit.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Mon Apr 25th, 2011 at 07:15:05 AM EST
[ Parent ]
Ah, yes, but if you have a reasonably sizeable VAT, then people have an incentive to keep a paper trail. Otherwise, they might find that the VAT that other people have invoiced as having paid to them exceeds their own markup. Which would be bad for the continued viability of their business as a going concern.

Besides, you can't borrow against future cash flow without paper trails. So large and medium-sized firms have an incentive to keep an audit-able paper trail. Particularly if you audit the banks to make sure that the money they issue is backed by an auditable future cash flow.

Small business have cashflows in cash. But small businesses don't do control fraud or aggressive accounting. They do conventional man-with-suitcase fraud, or simply don't disclose their incomes.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Apr 25th, 2011 at 12:03:18 PM EST
[ Parent ]

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