Many US Firms Found To Have Bought Tax Shelters From Auditors

by Leroy Baker, Tax-News.com, New York

28 February 2005

A new report by the Government Accountability Office has found that more than 10% of Fortune 500 firms bought tax shelter advice from the same accounting firms they hired to independently audit their financial statements over a five year period to 2003.

Using data compiled by Standard & Poor’s and the Internal Revenue Service, the GAO found that between 1998 and 2003, 207 of the Fortune 500 companies, (or 40%) purchased tax shelter services from a third party, of which 114 obtained them from an accounting firm, and 61 from their own auditors.

These findings are likely to intensify calls for tougher rules to ensure that the independence of financial auditors is maintained, and that conflicts of interest are reduced. They also come two months after the accounting industry regulator, the Public Company Accounting Oversight Board, released proposals that would restrict the ability of auditors to offer tax advice to their clients.

According to Senator Carl Levin (D – Michigan) who last week released the GAO report, the findings reveal that tax shelters are being “mass marketed by major accounting firms,” and strengthen the argument that the PCAOB proposals should be introduced to curb these conflicts of interest.

“Today’s GAO report provides further evidence of accounting firm involvement in tax shelters and why the new rules are needed. If we are going to restore public confidence in the financial statements of our public companies, auditors of those companies can’t be selling them abusive tax shelters that distort and misrepresent the companies’ tax liabilities and income,” Levin commented.

The PCAOB proposals would bar accounting firms from obtaining contingent fees from their audit clients, providing tax services to audit client executives, and promoting aggressive tax positions to the public companies they audit.

In a 13-page letter supporting the proposed rules, Levin argued that the proposals should be strengthened so that firms can avoid the appearance of a conflict of interest as well as actual conflicts.

Levin also recommended allowing accounting firms to promote only those tax products which would be very likely to be upheld in court.

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