Marketplace October 22, 2003
At this week's Senate Finance Committee hearing, witnesses described tax avoidance plans sold by major accounting firms and bought by America's biggest companies with no fear that the IRS would uncover the deals or impose meaningful penalties on them.
According to a report from the General Accounting Office released at the hearing, abusive tax shelters cost the United States government $85 billion this past fiscal year. To put this into perspective, the sum is just $2 billionshort of what President Bush says is needed to pay for the continued occupationand reconstruction of Iraq.
Wasn't there a wave of scandals almost two years ago, having to do with corporations cooking their books and dressing up their balance sheets, often through complex tax dodges engineered by accounting firms? Does anyone rememberEnron, which despite $2 billion in reported earnings between 1996 and 1999, didn't pay a cent in federal income taxes? Do you recall an accounting firm called Arthur Anderson that got caught up in the Enron scandal, and is no more?
And remember all that tough talk coming out of Washington, followed by what thepublic was led to believe was tough new legislation, and a tough new head of the Securities and Exchange Commission, and even a tough new agency to oversee accounting firms and make sure everything is whistle-clean?
Well, I've got news for you, folks. It's still legal for accounting firms to sell tax shelters to the very same corporations that buy their accounting services. And it's still legal for the same accounting firm to audit the books that include these shelters and sign off on them as meeting accepted accountingstandards.
This is a conflict of interest that gives definition to the term "conflictof interest." Obviously, if you're an accountant whose compensation is linkedto the amount of business you do, and if your corporate client wants you to make its financial statement look as good as possible, and if it's perfectly legal for you to offer aggressive accounting advice about how to change this expense to a write-off, or shift these profits to the Cayman Islands, or execute whatever tax dodge you can come up with -- you're going to do it. And then if it's perfectly legal for you or your firm to audit the books and give these dodges your seal of approval, you're going to do that, too.
William J. McDonough, chairman of the new Public Company Accounting Oversight Board, said yesterday that major accounting firms are suffering a complete ethical collapse. Well, thank you Mr. McDonough. Two years after Enron came to light, the question is what are you and Congress going to do about it? No number of congressional hearings, Oversight Board investigations, SEC rules, orIRS enforcement upgrades is sufficient.
What we need, plain and simple, is a law prohibiting accounting firms from selling tax advice to their clients.