Audit & Accounting

The Internal Revenue Service recommends that employers, payers and their agents begin using a new, improved version of the agent-appointment form immediately, to avoid delays in having the IRS approve the agent appointments. All versions prior to the May 2007 form are now obsolete. Form 2678, Employer/Payer Appointment of Agent, authorizes an agent to file tax returns and deposit and pay employment or other withholding taxes on an employer or payer's behalf. However, the employer retains responsibility for filing Form 940, Employer's Annual Federal Unemployment Tax Return, and depositing and paying FUTA tax. The IRS recently redesigned Form 2678 to make it clearer and more user-friendly. The redesign resulted from an initiative led by the IRS Office of Taxpayer Burden Reduction. The IRS will return any obsolete versions of Forms 2678 that are filed and ask senders to submit the May 2007 revision instead. When the IRS approves Form 2678, both the employer or payer and the agent are liable for the employer's employment tax.

Rep. Charles Rangel, D-N.Y., chairman of the House Ways & Means Committee, said House lawmakers might consider legislation that would raise taxes on the income of private equity and hedge fund managers. Under the current tax laws, private-equity companies can go public by paying a partnership tax rate of 15 percent versus the corporate tax rate of 35 percent. Rangel's proposal follows a Senate measure introduced last week requiring private-equity partnerships that go public after June 14 to pay corporate taxes.

The Public Company Accounting Oversight Board has identified deficiencies in eight audits performed by Big Four firm Deloitte during an inspection of the firm conducted over a six-month period in 2006. The audit overseer said that in some cases, the audit deficiencies "were of such significance that it appeared to the inspection team that the firm, at the time it issued its audit report, had not obtained sufficient competent evidential matter to support its opinion on the issuer's financial statements." The audit clients are not identified in the PCAOB's inspection report. A response letter to the board by the Big Four firm raised objections to the findings in two of the audits. Deloitte said that it was committed to "the highest standards of audit quality." The firm said that it has already begun work to address the board's concerns over the remaining audit reports. The report can be accessed at: http://www.pcaobus.org/Inspections/Public_Reports/index.aspx

The Public Company Accounting Oversight Board named insider C. Gregory Scates as deputy chief auditor. In that role, Scates, 53, will provide technical direction in the development of the board's standards. He will report to Tom Ray, the PCAOB's chief auditor and director of professional standards. Scates, who came aboard the PCAOB in 2003, helped develop Auditing Standards Nos. 1 and 3, which deal with reporting on audits in accordance with the standards of the PCAOB and audit documentation. He also has developed staff guidance on technical auditing matters, and led various current standards-setting projects. Prior to joining the PCAOB, Mr. Scates was associate chief accountant in the division of enforcement at the Securities and Exchange Commission.

The Center for Audit Quality, a affiliated group of the American Institute of CPAs, has signed on to the Aspen Principles, a set of guidelines focused on business practices, investment practices and the long-term competitiveness of U.S. business. Prompted by concerns about the short-term pressures on publicly traded companies and rising public sentiment against excessive executive compensation, the signing of the four-page document by 12 members of The Aspen Institute Corporate Values Strategy Group is the culmination of a two-year process. The Aspen Institute Business and Society Program spearheaded the lengthy initiative in collaboration with the Council of Institutional Investors and the Business Roundtable. Key provisions of the Aspen Principles call for: * Companies to stop providing quarterly earnings guidance to analysts and to not respond to analyst estimates. * Corporate boards to communicate with "long-term- oriented investors" on senior executive compensation. * Requiring senior executives to hold stock they are given for at least some period beyond their tenure with the company, thus tying them to the long-term growth of the company. * Banning senior executives from hedging the risk of long-term-oriented stock option compensation. * Providing for "clawbacks," which involve recouping senior executive compensation awarded based on the achievement of performance targets subsequently slashed or wiped out by corporate financial restatements. Other organizations that have signed the Aspen Principles include the AFL-CIO, PepsiCo, Pfizer and Xerox. Separately, the CAQ said that it would host a panel discussion and luncheon July 30 at the National Press Club in Washington to mark the fifth anniversary of the passage of Sarbanes-Oxley.

The just-released spring 2007 issue of the Statistics of Income Bulletin includes the first article on farm proprietorship returns by the Internal Revenue Service in more than 20 years, as well as articles on high-income individual income tax returns, taxpayers reporting noncash contributions, qualified zone academy bonds, international boycott reports and S corporations. In addition, this issue of the bulletin presents selected tax year 1990-2004 individual income tax return data that have been indexed for inflation, and tax year 2005 individual income tax return statistics classified by state and size of adjusted gross income. For tax year 2004, there were 3,021,435 individual income tax returns filed with adjusted gross income of $200,000 or more and 3,067,602 returns with expanded income of $200,000 or more. The Bulletin highlights the following: * For tax year 2004, there were 25.3 million individual taxpayers who itemized deductions and reported a deduction for noncash charitable contributions. Those taxpayers reported $43.4 billion in deductions for these noncash contributions. Individuals whose total noncash charitable deductions on Schedule A, Itemized Deductions, exceed $500 are required to report these donations in detail on Form 8283, Noncash Charitable Contributions. For 2004, a total of 6.6 million individuals, representing a little more than a quarter of those who reported noncash charitable contributions, filed Form 8283. These individuals reported noncash contributions valued at almost $37.2 billion, or nearly 86 percent of all noncash contributions. * The number of farm proprietorship returns declined between tax years 1998 and 2004, with the majority of farm proprietorship returns showing a farm net loss. For tax year 2004, some 1.4 million farm proprietorship returns, or 70 percent of the total, had a farm net loss. Gross farm income reported on sole proprietorship returns totaled $93.3 billion for tax year 1998 and increased 8.3 percent to $101 billion in 2004. Total farm expenses grew even more during this period, by 12.9 percent, from $101.2 billion in 1998 to $114.3 billion in 2004. * For tax year 2003, some 1,268 taxpayers filed Form 5713, International Boycott Report; of these, 124 reported receiving boycott requests, and 36 agreed to participate in a boycott. There were 41 taxpayers who lost a portion of their tax benefits as a result of their participation in a boycott or because they had operations in a boycotting country and claimed the extraterritorial income exclusion. Similarly, 1,343 Forms 5713 were filed for tax year 2004; of these, 131 taxpayers reported boycott requests, 45 agreed to participate, and 46 taxpayers reported tax consequences. For both years, the percentage of filers who lost tax benefits was approximately 3 percent. * The final bulletin article takes a look at the dominance of the wholesale and retail trade division among S corporations since 1959. For tax year 2004, some 45 years after the creation of S corporations, wholesale and retail represented the largest portion of total receipts, total deductions, portfolio income, total net income (less deficit) and total assets.

In a three-year-old legal fray that resulted in a mistrial in March, a jury here has found global audit firm BDO Seidman guilty for its failure to detect audit fraud that prompted a Florida financial services company to declare bankruptcy. The verdict stems from a suit filed in 2004 by Banco Espirito Santo SA, a Portuguese bank that charged BDO with failing to uncover some $170 million of fraud at financial services firm E.S. Bankest, a former partner of the bank.

The Treasury is seeking nominations for its previously announced strategy to establish an Advisory Committee on the Auditing Profession -- a committee charged with studying the accounting profession and ways to keep the auditing profession vibrant and the U.S. capital markets competitive. Last month, Treasury selected former Securities and Exchange Commission Chairman Arthur Levitt and former SEC chief accountant Donald Nicholaisen to help lead the effort. The committee is expected to take about a year to study topics such as the concentration of the Big Four and their exposure to potentially crippling shareholder lawsuits. The panel is scheduled to begin its work in the fall. Nominations should be sent to ACAPmembership@do.treas.gov or Advisory Committee on the Auditing Profession Membership, Office of Financial Institutions Policy, Department of the Treasury, Main Treasury Building, Room 1418, 1500 Pennsylvania Avenue, NW., Washington, D.C. 20220. Nominations must be received on or before July 11, 2007.

One month after four employees of Big Four firm Ernst & Young were charged with conspiracy to commit tax fraud, a former employee of the audit firm has pled guilty to similar charges. Dallas-based E&Y employee Belle Six entered her plea in Federal District Court in Manhattan. Six, who worked in the firm's Viper Group that created and sold tax shelters, will, according to her agreement, forfeit some $13 million she received as compensation.

E&Y DECLINES RE-ELECTION AT TELETECH