Audit & Accounting

Big Four firm KPMG, which is sweating out a possible indictment from the Department of Justice over its sale of tax shelters, is working to limit its liability from civil suits by negotiating with class-action firm Milberg Weiss Bershad & Schulman.According to The New York Times, Milberg Weiss is working with the firm to reach a "prepackaged settlement" with clients of the shelters who claim that they were hurt by purchasing the products.According to documents filed in federal district court in Hot Springs, Ark., KPMG had recently began talks with Milberg Weiss; under the reported settlement terms, KPMG would pay $195 million.A representative from Milberg Weiss told WebCPA that the firm could not comment. Currently, the firm faces a class-action suit filed by Bernstein Litowitz Berger & Grossmann, and the class includes purchasers of a KPMG shelter from January 1998 to Oct. 31, 2000.Other defendants in the class action are Presidio, an investment advisory firm started by former KPMG partners; Deutsche Bank; and Sidley Austin Brown & Wood, a law firm that issued favorable opinion letters on the shelters.

President Bush's Advisory Panel on Federal Tax Reform will likely hold a July meeting to review the information and comments gathered during the ten days of public hearings that the panel has convened since its inception in January. According to Tax Analysts, the reform panel groups have been reviewing materials in preparation for their final recommendations, which is scheduled to be presented to Treasury Secretary John Snow Sept. 30. Prior to that, however, the panel's final recommendations will probably be presented in a September public hearing.

Big Four firm PricewaterhouseCoopers and McLean, Va.-based Brabeion, a provider of IT security risk and compliance tools, have entered into a pact whereupon Brabeion will be PwC's third-party provider of security content as part of Brabeion's Enterprise Security Architecture System. Terms were not disclosed. PwC originally developed ESAS to help large organizations manage and implement enterprise-wide security policies. Brabeion purchased the ESAS solution from PwC in April 2005.

The Multistate Tax Commission, a consortium of 47 state governments that works to hone the administration of tax laws applicable to multistate enterprises, has named Joe Huddleston Esq. as its executive director. Huddleston begins begin Aug. 1, and succeeds interim ED Rene Y. Blocker. Huddleston was most recently vice president of tax solutions for Liquid Engines Inc., a tax software firm focused on state income tax planning models and methodologies for multi-state and multinational companies. Prior to that, he was a state and local tax partner at national CPA firm Grant Thornton, serving middle-market and Fortune 500 companies He also served as commissioner of the Tennessee Department of Revenue from 1987 to 1995. "I look forward to working with state tax organizations as we address the challenges that will define the next several years," said Huddleston in a statement. "The MTC has made enormous strides in recent years, and I very much intend to help write the next chapter of the continuing success story at the commission."

Following a decision by a federal appellate court that overturned a Securities and Exchange Commission ruling that required at least 75 percent of mutual fund directors to be independent of the fund company, the commission said that it would vote on the matter June 29. The SEC adopted the rule roughly a year ago, when the $7 trillion mutual fund industry was embroiled in a series of late-trading scandals. The SEC mandate required that the fund board chairman and three quarters of fund directors have no direct ties to the manager of the respective fund. The court ruled that the regulator had the authority to adopt the rule; however, it maintained that the commission had not considered any alternatives and did not consider the costs of such a rule. Under that mandate, it was estimated that roughly 3,700 funds would have to seek new chairmen. Prior to next week's vote, the SEC would have to perform more extensive studies on the costs of compliance with the rule.

H.B. 492, a bill requiring personal finance education for high school students in Texas, has been signed into law by Gov. Rick Perry. The bill, which had the support of the Texas Society of CPAs, was first introduced in the Texas House of Representatives. Prior to its passage, TSCPA chairman Ed Polansky had testified in favor of the legislation in March. Polansky said that the TSCPA would help school districts comply with the bill by continuing to make available the multi-lesson curriculum guide that was developed by the American Institute of CPAs. Texas now becomes the eighth state to require personal finance education for high school graduation, joining Alabama, Georgia, Idaho, Illinois, Kentucky, New York and Utah.

The Professional Oversight Board of Accountancy, the auditing regulator for the United Kingdom, said that it had discovered some procedural deficiencies in a round of audit inspections of 27 British corporations conducted by Big Four firms. Overall, the report stated that it didn't find any "systemic weakness" in the auditing firms' procedures, but noted that in at least two instances, the POBA had concluded that "there was sufficient doubt as to whether" the company being audited "had applied the correct accounting treatment or made appropriate disclosures." "The quality of audits is under threat from a number of risks which are not addressed by all firms in all audits," said POBA Chairman Sir John Bourn. "We found that each of the Big Four firms of auditors have the necessary infrastructure in place, and the commitment, to complete good quality audits. However, where the firms do not follow their own procedures they expose themselves to the risk that future audit opinions may not be appropriate." However, the report did not specifically identify any of the firms in the report -- KPMG, PwC, Ernst & Young and Deloitte. The POBA was established last year. A copy of the report can be obtained at www.frc.org.uk/poba/publications/.

In a 3-0 ruling, a federal appeals court overturned a Securities and Exchange Commission ruling that required at least 75 percent of mutual fund directors to be independent of the fund company. According to published reports, the appellate court ruled that the regulator had the authority to adopt the rule; however, it maintained that the commission had not considered any alternatives and did not consider the costs of such a rule. Under that mandate, it was estimated that roughly 3,700 funds would have to seek new chairmen. The rule was to go into effect next year. With the decision, the matter will again to back to the commission, but it is not expected to be reviewed until a permanent replacement for Chairman William Donaldson is appointed. Donaldson will step down June 30.

J.J. Pickle, former Congressman, tax writer and an ardent reformer of Social Security, died last week here at the age of 91. While serving as chair of the Ways and Means Committee Social Security Subcommittee, Pickle was a key figure in Social Security legislation to keep the system from becoming insolvent and was, according to reports, responsible for the provision that gradually raised the age of eligibility for benefits from 65 to 67. Pickle also served as chair of the Ways and Means Oversight Subcommittee, where he promoted research incentives and investigated a host of tax issues. He retired from Congress 10 years ago, after serving more than three decades.

In just-released Revenue Ruling 2005-40, the Internal Revenue Service has underscored the fact that risk distribution must be present for smaller arrangements to qualify as insurance for federal income tax purposes. The ruling does not call into question the vast majority of insurance contracts issued by commercial insurance companies in the ordinary course of business. Since the Supreme Court's 1941 decision in Helvering v. LeGierse, both risk shifting and risk distribution have been required for an arrangement to constitute insurance for federal income tax purposes. The ruling concludes that an arrangement with an entity that "insures" the risks of only one policyholder does not qualify as insurance for tax purposes, because the risks are not distributed among other policyholders. The ruling also explains how this conclusion applies to single-member limited liability companies, which in some cases are treated as entities separate from their owners and in other cases are disregarded. Qualification of an arrangement as insurance may affect whether the issuer is taxed as an insurance company and whether or when amounts paid under the arrangement may be deductible. If an arrangement does not qualify as insurance, it may instead be characterized as a deposit, a loan, a contribution to capital or an indemnity arrangement other than an insurance contract. The ruling was accompanied by Notice 2005-49, soliciting comments from the public on additional standards relating to what constitutes insurance.