Corruption Fallout: Lawyers at Odds With Accountants
Accountants and lawyers, two professions enmeshed in last year’s corporate scandals, now are fighting each other for billions of dollars worth of business — and the Senate’s only accountant is joining the fray to keep it fair.
Sen. Mike Enzi (R-Wyo.) told me through an aide last week that he intends to see that tax lawyers are covered equally with accountants under the Sarbanes-Oxley law passed in the wake of Enron, WorldCom and other scandals.
[IMGCAP(1)] Accounting firms accuse tax lawyers of using the Securities and Exchange Commission’s rule-making process under the new law to squeeze them out of the lucrative business of giving tax advice to businesses they audit.
The accountants also claim that law firms are trying to scare corporate boards into hiring lawyers instead of accountants to do their tax work in order to stay out of trouble with the government.
Tax lawyers say they are merely ensuring that the principle of “auditor independence” applies when corporations get advice on tax matters that might lead to trouble with the Internal Revenue Service.
Enzi, who took a lead role fashioning parts of last year’s reform law, said it was an error that a corporation’s all-important audit committee must give specific permission for the company’s accounting firm to do tax work, but not a law firm seeking to do the same work.
“Congress was so entirely focused on the accounting industry that the bill allowed tax lawyers to provide tax and other services without preapproval by the audit committee,” he said.
“The bill isn’t meant to be a rainmaker for lawyers. We must have equal accountability for accountants and lawyers.”
He vowed to “address this issue and other areas of conflict in the coming months by working with the SEC and, if necessary, seeking corrective legislation.”
Actually, if he is going to intervene with the SEC, he needs to do it fast. The comment period for the tax-advice rule closes today, and the SEC is scheduled to make a final ruling by the end of the month.
If the accounting industry were to be blocked from providing tax services to companies it audits, it would represent yet another major blow to a once-honored — and still politically powerful — profession.
It became clear that some accounting firms, depended upon to furnish honest audits of corporate books, winked at or colluded in illicit practices in order to secure fat contracts from corporations.
Arthur Andersen, accountant for Enron and other troubled firms, was indicted and forced out of business in the scandal, reducing the industry’s Big Five firms to four.
The remaining firms have been forced to stop consulting for companies they audit, and Congress’ reform bill, named after Sen. Paul Sarbanes (D-Md.) and Rep. Mike Oxley (R-Ohio), prohibited them from other activities, including giving legal advice, doing advocacy and providing information-technology services.
The legal profession was less broadly tarnished by corporate scandals, but some firms — notably Vinson & Elkins, Enron’s firm — were accused of helping structure illicit deals and hide wrongdoing from authorities.
The SEC currently is considering a rule that would require lawyers, if they can’t get the attention of corporate executives, to make a “noisy withdrawal” and inform the SEC of wrongdoing.
Lawyers are fighting that rule, contending that whistle-blowing to outside authorities would force them to violate their clients’ lawyer-client privilege.
The lawyer-disclosure rule now is well-publicized. The fight between tax lawyers and accountants so far has escaped notice.
The Sarbanes-Oxley law explicitly permits accounting firms to furnish “tax services” to companies it audits — provided the firm’s audit committee approves.
Oxley told the Bloomberg news service in December that “tax issues were part and parcel of audit services. There was no evidence in our hearings that the tax function was untoward and somehow led to fraud.”
However, the law does not define “tax services” and prohibits accountants from doing legal work and “advocacy,” creating ambiguities that the American Bar Association’s tax section is seeking to exploit.
The tax section told the SEC in a December filing, “We believe that in view of the breadth of services now provided by accounting firms under the category of ‘tax services,’ it is beyond dispute that some tax services create auditor independence risks.”
An official of the 20,000-member tax section didn’t want to discuss charges that lawyers were trying to steal business from accountants.
But he said that his group was trying to draw attention to “problems” with auditors doing certain tax work, including marketing tax shelters and giving advice that might lead to disputes with the IRS.
Business groups such as the U.S. Chamber of Commerce and even the business section of the ABA are siding with the accounting profession against the tax lawyers.
Oxley’s staff said that he was not going to get involved. He told Bloomberg that the SEC should “define the intent of the law … and move forward.” Hopefully, it’ll happen.