Nobody is called to account

Last week the Financial Services Authority revealed that 5.3 million endowment mortgage policy holders face a shortfall of around £30bn. This is on top of the £11bn pensions mis-selling scandal affecting around 1.4 million people. UK bank chiefs admit that credit companies are ripping people off and more than £100bn is estimated to be sitting in bank accounts giving derisory returns to investors.

There have been some puny fines for pension mis-selling, but no company executive has returned his or her financial rewards. No company has been prosecuted or closed for the biggest financial scandals.

Yet this is only a small part of the rottenness affecting the finance industry. Its fingerprints are clearly visible on the Parmalat, Enron, WorldCom and other scandals. Many dubious transactions and schemes were designed by accountants, lawyers, bankers and financiers with only one thing in mind: their fees.

When executive pay packets are tied to financial results, almost anything goes. Some of the biggest financial houses have been hyping up business with misleading research, unduly influencing the market and making secret fees. In April 2003, after extensive investigations, 10 big financial houses (including Citigroup, Credit Suisse, Merrill Lynch, Morgan Stanley, Goldman Sachs, Lehman Bros, JP Morgan, Bear Stearns and UBS Warburg) were fined a total of $1.4bn (£760m) by US regulators for feeding misleading stock market research to investors in an attempt to drum up business and higher fees.

For years, Morgan Stanley steered clients toward "preferred" mutual funds in exchange for millions of dollars in commission payments from those fund companies. Investors were not told of the practice nor the higher fees. The regulators eventually homed in and, in November 2003, the company was fined $50m.

In 2002, banking giant Credit Suisse First Boston (CSFB) agreed to pay $100m to US regulators to resolve allegations of abuses involving initial public stock offerings. A few months later, two executives were fined $200,000 each for their role in the firm's alleged abuses in distributing shares of hot new stock offerings.

The comparatively light fines seem to do little to curb the industry's appetite for more money and profits. The $7.5 trillion-a-year US mutual fund industry is engulfed in scandals. It is the usual story of secret kickbacks for promoting stocks.

Another example of rapacious behaviour, some of it lawful even if anti-social, is corporate tax avoidance, which has reached epidemic proportions. With the help of accountants and lawyers, WorldCom funnelled $19bn of income through tax haven subsidiaries to avoid taxes. Enron paid its bankers, lawyers and accountants $88m to avoid $2bn in taxes. A 2,700-page report by a US senate committee estimates that it will take 10 years to unravel the dubious schemes operated by the company. Yet the tax avoidance industry shows no remorse or sense of public responsibility.

Another report by a senate committee claims that Deutsche Bank lent billions to enable companies to construct transactions for the sole purpose of avoiding taxes. In recent years, large accountancy firms earned $1bn in fees from selling tax avoidance schemes, which the authorities are closely examining, especially as $85bn of tax revenues have been lost. The tax authorities are investigating 125 accounting, banking and law firms for selling tax avoidance schemes which may be costing the US taxpayer $170bn each year. The Big Four accounting firms, PricewaterhouseCoopers, Ernst & Young, Deloitte and KPMG, are facing regulatory action and a number of lawsuits over tax schemes which may be unlawful.

According to a senate report, KPMG had a complex infrastructure for developing, marketing and selling around 500 tax products. Just four strategies netted $180m in fees. In internal emails, a senior US tax professional told colleagues that if regulators took action over their sales strategies, the possible penalties were much less than the potential profits. One email said: "Our average deal would result in KPMG fees of $360,000 with a maximum penalty exposure of only $31,000." KPMG recently announced that it had overhauled its US tax practice.

The same financial mammoths dominate the UK, but regulators here do little to check their power and privileges. The chairman of the Financial Services Authority admitted last April to having "evidence of systemic bias in analyst recommendations and of bad management of conflicts of interest" among merchant bankers, financial analysts and stockbrokers, but there have been no prosecutions and the government rarely shows any interest in cleaning up the finance industry.

Other countries make estimates of tax avoidance, but the UK paymaster general routinely tells parliament that such things are impossible. For the period 1990-2003, UK companies had an average rate of profitability of 11.5% against an inflation rate of around 4%. Yet the corporate tax collection has increased from £21.5bn to only £29.3bn. Just to keep pace with inflation, the figure needed to be nearly £36bn. It would be helpful to know why some well-known companies pay less than the 30% rate of corporation tax.

Openness, accountability, and, where appropriate, prosecutions could persuade the industry to think about the consequences of a predatory culture, but are absent from the companies bill going through parliament. There are no proposals for dealing with "offshore" operations and none of the 23 "buck-passing" regulators dealing with accountancy firms have "tax avoidance" in their sights. To make it worse, the government is proposing to "cap" the liability of company directors and auditors. Diminished accountability will encourage more selfish excesses. How many people must lose their jobs, homes and savings before the government cleans up the finance industry?

· Prem Sikka is professor of accounting at the University of Essex

prems@essex.ac.uk