Sunday, July 11, 2004

Linda Beale (Illinois) has published Putting SEC Heat on Audit Firms and Corporate Tax Shelters: Responding to Tax Risk with Sunshine, Shame and Strict Liability, 29 J. Corp. L. 219 (2004). Here is part of the Conclusion:

The evidence of accounting firm involvement in the tax shelter industry is undeniable. The traditional permissive stance towards auditor tax consulting has already proven itself unreasonable, most conspicuously in the Arthur Andersen collusion with Enron in tax-motivated transactions that had immediate financial statement results and in the Ernst & Young provision of tax shelter advice to Sprint executives, resulting in the necessity of firing either auditor or executives. Several factors propel the current shelter business, including underenforcement, the trend towards treating corporate tax and finance departments as revenue generators, the conflicting roles of auditors who provide aggressive tax planning, and inadequate information about tax risks. The apparent correlation between aggressive accounting and aggressive tax planning suggests that tax risk information can be an important analytic tool for audit committees and investors.

This Article proposes, therefore, that the SEC use the corporate tax shelter regulations to demarcate permissible non-audit tax consulting for audit clients. Objective information about reportable and list-maintenance transactions should also be provided to audit committees, in the form of audit firm and reporting company tax risk profiles. Audit committees can thus be armed to exercise appropriate oversight over internal controls, select external auditors, and evaluate the risks of having external auditors perform non-audit tax services. The information can be shared with investors through the MD&A section of periodic reports and registration statements. Congress should reinforce these requirements by permitting the SEC to levy strict liability penalties in its proceedings for failure to disclose (and possibly for gross understatement of tax accruals). The effect of these changes would be to put auditors back where they belong–as the public’s watchdog snipping at the tail of advisers (especially law firms and other accounting firms) that give their blessings to aggressive tax strategies. Incidentally, the corporate tax shelter problem should suffer a further blow….