NY Times: Big 4 Accounting Firm Auditors Sign Off On Dubious Tax Strategies Designed By Their Firm

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New York Times, Officials Balked at a Drug Company’s Tax Shelter. Auditors Approved It Anyway.:

Big 4Court documents show the potential conflicts of interest when accounting firms simultaneously help clients avoid taxes and audit their finances.

The drug company Perrigo had a problem.

Consultants at the giant advisory firm EY had devised an elaborate arrangement that would allow Perrigo, one of the country’s leading makers of nonprescription drugs, to avoid more than $100 million in federal taxes. But the company’s outside auditors, at the accounting firm BDO, were questioning the setup’s propriety.

Perrigo soon replaced BDO with EY as its auditor. At least one EY official, too, expressed concern that the tax shelter his colleagues had designed was overly aggressive.

Even so, auditors at EY, also known as Ernst & Young, eventually blessed the transactions, which federal authorities now claim were shams, according to previously unreported documents made public in a court case last year.

Accountants have a reputation as bean counters. In reality, their audits are a linchpin of global capitalism: Investors need to be able to trust that companies’ numbers are reliable and have been reviewed by credible outsiders. Having a reputable auditing firm sign off on your financial statements is therefore a prerequisite to being listed on a major stock exchange and attracting significant investments.

To avoid suspicions that auditors are overlooking problems in order to please big clients, accounting firms are supposed to keep an arms-length relationship with the companies they oversee.

But in the two decades since a series of corporate accounting scandals spotlighted the lack of independence between auditing firms and their leading clients, the problem remains. Today, the Big 4 accounting firms all offer giant companies a wide array of consulting and tax-planning services — at the same time they are serving as ostensibly independent outside auditors.

Internal EY emails and memos — made public last year in a court case in which the I.R.S. is challenging Perrigo’s tax arrangements and accusing EY of constructing “an abusive tax dodge” — provide a rare inside look at the potential conflicts of interest that arise as a single firm constructs tax shelters and simultaneously audits its own work. …

Nowhere is the tension over accounting firms’ multifaceted roles more pronounced than in the lucrative business of advising companies on how to slice their tax bills.

The Big 4 accounting firms — EY, KPMG, PwC and Deloitte — have emerged as perhaps the most powerful private-sector force in U.S. tax policy. They lobby federal officials to tweak tax rules to help their clients. A steady stream of lawyers from the firms rotate in and out of senior tax positions in the Treasury Department, where they write rules favorable to their former clients.

At the same time, the Big 4 firms help companies move profits out of the reach of the U.S. government. Then the companies’ auditors — often a different group of employees from the same firm that created the structures in the first place — have to sign off on the setups. In assessing their legitimacy and the effect on the client’s financial results, the auditors frequently consult with the colleagues who devised the tax strategies.

The I.R.S. is taking a dim view of these The agency is challenging offshore tax arrangements at Coca-ColaFacebook and Western Digital, alleging the companies owe the U.S. government billions of dollars as a result of moving too much of their profits abroad.

In all of those cases, the accounting firm that constructed the elaborate tax plan later signed off on the company’s books in its capacity as its independent auditor.

New York Times, The Big 4’s Tax Problem:

Regulators are turning up the heat on the Big 4, the largest accounting firms in the U.S. — Deloitte, PwC, EY and KPMG. Increasingly, their size and the variety of services they offer, like tax consulting, are raising questions about the independence of their audits and landing the firms in hot water.

(Hat Tip: Michael Talbert)


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