It's hard to believe the board of ACC Bank didn't know the bank could have a potential tax liability of £17.5 million at a time when the bank itself was worth just £20 million - yet its auditors and tax advisers, Ernst & Young, say this is so.
The Public Accounts Committee established yesterday that at no point did Ernst & Young recommend the State-owned bank should make any provision in its accounts for such a massive liability to the Revenue Commissioners in relation to unpaid DIRT, which was discovered in 1992. When asked why, Ernst & Young managing partner Mr John Hogan explained there was no need to take that kind of action, because he believed the bank would never have to pay £17.5 million to the Revenue. That figure was calculated following an inspection of eight ACC branches with the largest number of accounts which were not liable for DIRT in 1992. It was done as part of an exercise to compile a long form report that could be given to potential bidders if the bank was partly privatised. Where Ernst & Young found the branches didn't have the necessary non-resident declaration forms for those accounts, or where the documents were incorrectly filled out, it automatically classified them as liable for DIRT. The total bill came to £17.5 million.
Both ACC and Ernst & Young have pointed out this calculation included a DIRT payment on accounts for a State-run charity which held £13 million, but for which the necessary declarations were missing. As charities are exempt from DIRT, Mr Hogan insisted that once the necessary declarations were put in place, the £17.5 million liability would have been greatly reduced. Mr Hogan stated the £17.5 million liability was arrived at following an "absolutely prudent view of the situation". Under the letter of the law, he admitted, ACC had a potential DIRT liability of £17.5 million but never brought it to the attention of the board, or the bank's main shareholder, the Minister for Finance, even though such a tax demand would have jeopardised the bank's solvency.
Like AIB, ACC and its tax advisers thought the Revenue would never go after DIRT arrears. Mr Hogan said he made that judgment following a meeting between his colleagues and the Revenue Commissioners in 1992 where they believed they had secured an amnesty. Once ACC was prepared to clean up its act in relation to bogus non-resident accounts, the Revenue would reward it by turning a blind eye to its previous sins.
The two Revenue officials who attended that meeting vehemently disputed that version of events yesterday, expressing amazement that anyone should have left the room with an impression that they were offering to write-off unpaid tax.
Revenue inspector Mr Denis O'Connell said he didn't know how Ernst & Young tax adviser Mr Declan O'Neill could have got that impression. "We clearly stated the obligation was on the bank to comply with the law." Mr O'Connell told the committee that, as a former inspector of taxes, Mr O'Neill would have been aware that any settlement of back tax had to go to the Revenue board.
Mr O'Neill explained to the Revenue officials that day the bank had some problems in relation to missing declarations on non-resident accounts, but that the matter was being resolved. Yet around the same time Ernst & Young discovered the potential £17.5 million tax liability and established that half the non-resident accounts in ACC Bank had no declarations. "You must be a good poker player," Mr Bernard Durkan suggested. "You had information that affected the solvency of the institution and withheld it from the Revenue." Mr Hogan told the committee the firm accepted it had uncovered some serious problems in relation to compliance with DIRT and had brought it to the attention of the bank's audit committee.
But as that liability was contained in a first draft of its long form report, there was no need to trouble the chief executive or the members of the board. The bank's major shareholder - the State - was also kept in the dark. And as the proposed part sale of the bank was later abandoned, a final version of the report never materialised - and neither did ACC's £17.5 million tax liability.