by Ken Rankin

Washington -- The accounting profession took another recent pasting on Capitol Hill as government officials and industry whistleblowers took turns criticizing accounting firms for their role in the growth of abusive corporate tax avoidance schemes.

In testimony before the Senate Finance Committee, Michael Brostek, tax director at the General Accounting Office, said that the shelters promoted by some accounting firms have “heightened awareness of abusive shelters and highlighted the importance of the Department of Treasury and the IRS addressing the problem.”

Brostek, who cited Treasury estimates suggesting that the tax loss resulting from abusive shelters totaled $33 billion over the past decade, was joined by a parade of other regulatory officials who expressed dismay at the promotion of tax avoidance schemes by the accounting industry. An Internal Revenue Service database on shelter transactions said that losses from similar but unknown transactions could total an additional $52 billion.

In his testimony before the Finance Committee, Public Company Accounting Oversight Board Chairman William J. McDonough pledged to use the PCAOB’s audit firm inspection authority to crack down on abusive tax shelter promotions by accountants.

During the board’s regular inspections of audit firms, “we will identify and examine how firms audit ques-tionable tax-oriented transactions, and will also look for auditors’ involvement in structuring such transactions,” he told the committee.

“Because we are only beginning to build our inspections program, we cannot today assess the current extent of promotion and use of corporate tax shelters and products,” McDonough said.

But that’s likely to change as soon as the PCAOB’s inspectors start homing in on questionable tax avoidance transactions promoted by auditors.

Specifically, McDonough said that PCAOB inspectors would be “looking at compensation, promotion, and retention issues” to help determine whether the accounting firm’s policies and practices “create incentives for firm audit personnel to promote such transactions to their clients.”

For his part, IRS Commissioner Mark W. Everson told lawmakers that the ongoing crackdown on the promotion of abusive tax avoidance schemes by legal and accounting firms continues to be a “significant priority” for the tax service.

“Where the IRS believes a firm has failed to comply with the rules, the service will not hesitate to audit, whether the firm is a prestigious and well-known organization, or a lesser-known firm,” he said.

Over the past two years, the IRS crackdown on tax shelter promoters has resulted in legal action against a series of major accounting firms, including Grant Thornton, KPMG, BDO Seidman and Ernst & Young. Everson said that those firms “were acting as promoters of tax shelters, and not simply as tax or legal advisors” to their many clients.

Senate Finance Committee chair Chuck Grassley, R-Iowa, took some shots of his own at the accounting industry, noting that the abusive tax shelters that ultimately drove the nail in Enron’s corporate coffin were marketed by major accounting firms and other presumably reputable tax advisors.

“Enron wasn’t the lonely Maytag repairman when it comes to creating tax shelters and buying tax shelters,” Grassley quipped at the start of the Senate hearings.

“Enron had a lot of help from investment bankers, law firms and accounting firms, and these tax shelter hucksters sold tax shelters not only to Enron, but to other companies as well — and they continue to do so today,” he added.

Big Four firm KPMG came under particularly sharp criticism during the hearing as one of that firm’s former senior managers told Congress of an “abusive tax shelter environment at KPMG” that has created auditor independence problems.

Mike Hamersley, an attorney and former senior manager at KPMG’s Los Angeles Mergers and Acquisitions Tax Practice, testified that he was placed on administrative leave of absence from his job after “refusing to endorse or participate in what I believed to be illegal conduct.”

“During my tenure at KPMG, I have observed several disturbing practices and workplace conditions with respect to the promotion of abusive tax shelters,” including “tax professionals attempting to conceal from the IRS the existence of a transaction or discovery of unfavorable facts associated with tax shelters,” Hamersley said.

Hamersley testified that, to trivialize the risks that are posed by tax shelters, KPMG promoters told potential clients that “all public accounting firms are selling these tax shelters and the government cannot shut down all of these firms.”

KPMG denied Hamersley’s charges, and characterized his testimony as consisting “largely of generalized speculation, personal opinion and unsupported allegations. His conclusions are simply wrong,” a spokesman for the firm said.

Worse still, the KPMG whis-tleblower maintained that the promotion of abusive tax shelters to the firm’s audit clients has created conflicts of interest that may have jeopardized auditor independence in at least one case.

Hamersley said that tax professionals who raised objections “were stifled and reprimanded — and their opportunities for advancement were limited.”

“As a result of their desire to win over the audit client management, certain KPMG tax partners involved on the audit exercised excessive advocacy, lack of objectivity and professional due care and skepticism, and other improper conduct,” he told the committee.

“Fearing that KPMG might be fired by the client, KPMG tax partners rapidly reversed their position and permitted the audit client management to include a several hundred million-dollar tax benefit while these partners intentionally ignored highly unfavorable facts and law directly on point and failed to conduct any significant research on the most problematic points,” he said.

KPMG responded that when Hamersley’s charges were initially raised in a lawsuit against the firm, they were “taken seriously, were investigated, and were reviewed thoroughly by more experienced and expert tax and audit personnel at KPMG,” the firm said. “In each and every case, Mr. Hamersley’s allegations were found to be without merit and his analysis to be flawed.”

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