Levin Releases Letter, GAO Report on Tax Shelter Services by Accounting Firms

Levin Releases Letter, GAO Report on Tax Shelter Services by Accounting Firms

Sen. Carl Levin, D-Mich., today released a letter supporting proposed rules to strengthen auditor independence and limit the ability of auditors to sell tax shelters to the publicly traded companies they audit. Levin also released a new report by the Government Accountability Office (GAO) with data on the tax shelter services actually provided in recent years by accounting firms to public companies and the companies' officers and directors.

For more than a year, the U.S. Senate Permanent Subcommittee on Investigations, on which Levin serves as the Ranking Minority Member, has been examining actions taken by professional firms, including accounting firms, to promote abusive tax shelters.

"The Subcommittee's investigation showed abusive tax shelters were being mass marketed by major accounting firms," said Levin. "In response, the accounting oversight board has proposed new rules to keep accounting firms out of the aggressive tax shelter business. Today's GAO report provides further evidence of accounting firm involvement in tax shelters and why the new rules are needed. Hopefully, those rules will be finalized in the next few months. 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."

The 13-page letter released today strongly supports the rules proposed by the Public Company Accounting Oversight Board to increase auditor independence and reduce conflicts of interest related to tax shelter services provided by auditors to the public companies they audit. The proposed rules would require registered public accounting firms to maintain independence from the public companies they audit, and bar them from obtaining contingent fees from their audit clients, providing tax services to audit client executives who oversee the company's financial statements, and promoting aggressive tax positions to the public companies they audit.

The Levin letter cites the Subcommittee's work on abusive tax shelter promoters as evidence of the need for the rules. It also recommends that the proposed rules be further strengthened in several ways. It recommends, for example, amending the proposed auditor independence rule to require auditors to avoid the appearance of a conflict of interest as well as actual conflicts. The letter also recommends allowing accounting firms to promote to public companies only those tax products which would be very likely to be upheld in court, rather than tax products with a lesser probability of being upheld in court.

The GAO report released today, which was prepared at Levin's request, provides an analysis of data on how many Fortune 500 companies obtained tax shelter services from their auditor or another accounting firm. Using data compiled by Standard & Poor's on public corporations and Internal Revenue Service data on tax shelters, GAO determined that for the five year period, 1998 to 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 auditor.

The GAO report also found that 57 of the Fortune 500 companies saw one or more of their officers or directors obtain tax shelter services from a third party, of which 33 had obtained these services from an accounting firm, and 17 from their company's own auditor.

GAO estimated that, altogether, 114 of the Fortune 500 companies and 4400 individuals in the IRS database had obtained tax shelter services from an accounting firm, resulting in estimated total tax revenue loss to the U.S. Treasury of about $32 billion. When GAO considered all tax shelters for all years in the IRS database, not just tax shelters promoted by accounting firms, it found that 207 Fortune 500 companies and over 10,300 individuals in the IRS database had engaged in tax shelter transactions with an estimated total tax revenue loss of nearly $129 billion.

http://levin.senate.gov/newsroom/release.cfm?id=232545