Monday, May 23, 2005

Legal ethics: When the business gets though...

After the code of practice, what better than an incursion into legal ethics, with the real life of a tax adviser in the US and the issue of Big Four accounting firms providing aggressive tax planning.

US Senate hearings revealed that from the late 1990s KPMG devoted significant resources to developing and mass marketing hundreds of abusive tax shelters. These products were designed to enable their purchasers, typically high wealth individuals and Fortune 500 companies, to avoid paying taxes on the huge financial gains they enjoyed during the stock market boom. During the last few years, government investigations and lawsuits brought by the IRS and former clients have exposed the tax shelter activities of Arthur Andersen, PwC, Ernst & Young, and Deloitte. But KPMG may be the firm in the most trouble. After its tax shelter activities came to light, the Justice Department launched a criminal investigation, with some thirty current and former partners and employees as subjects. Despite disbanding its tax shelter practice and replacing several high level partners involved, the firm continues to be at risk of indictment and will likely be liable for substantial fines.

It was a lawyer who finally exposed KPMG’s shelter activities. In the summer of 2002, Michael Hamersley, a tax lawyer who had worked at the firm for four years and was a few weeks shy of partnership, refused to sign off on the tax treatment of a transaction that was part of a KPMG audit of a Fortune 500 company. Pressured to destroy documents related to the audit, which he believed was fraudulent, Hamersley contacted federal authorities. His cooperation in a government investigation during the subsequent year brought the details of KPMG’s shelter business to light.

A recent paper called “Travails in Tax: KPMG and the Tax-Shelter Controversy by Professor Tanina Rostain of the New York Law School, discusses this issues and offers a extremely interesting insights on the risks of law practice in large professional organizations in the twenty-first century and some of the particular accounting firm practices in the tax business.

First of all, I should say that KPMG is for no means the only large accounting firm involved, just remember my god old Arthur Andersen (et even disappeared)! Secondly, my short profession experience has told me that the scenario in Europe is much different than the US landscape. Therefore, such stories and calls for reform should always be considered from the perspective of the American business and not easily adapted to the European way of doing business. Nevertheless, and I speak for myself, I think this kind of stories help us understand the ethical problems that many times are inherent of providing any type of advice, as for example tax advice.

If you are interested read the Rostain, Tanina, "Travails in Tax: KPMG and the Tax-Shelter Controversy" LEGAL ETHICS: LAW STORIES, Deborah L. Rhode & David J. Luban, eds., Foundation Press, 2005
I could say that "when the business gets though...the tough go to prison (at least in the US!)".


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