KPMG
...ing an accounting career. However, the increased emphasis on the quality of accounting and auditing could make the profession more attractive to students seeking challenging, meaningful assignments and high levels of responsibility. The Enron Aftermath One of the biggest news stories in recent years was the bankruptcy of Enron, an energy trader accused of shoddy accounting practices. Besides shareholders and employees, the Enron scandal also took as its victim one of the most prominent firms in the accounting profession: Andersen, Enron's auditor. In May 2002, Arthur Andersen became a firm under siege: undergoing Justice Department prosecution for obstruction of justice, watching the resignation of its worldwide leader, suffering a constant stream of client defections, and losing staff and partners both domestically and worldwide. After divestiture talks with Ernst & Young, KPMG and Deloitte & Touche all faltered, the firm suffered the equivalent of the death penalty for an accounting corporation: in June 2002, it was legally barred from auditing public companies. The firm appealed, but the verdict was upheld in September 2002. This event has had a number of outcomes, including higher audit costs, increased SEC and client scrutiny of auditor performance, a flight of clients to lower-cost, second-tier accounting firms, and increased auditor independence as they become less beholden to consulting fees. The unfortunate results of the Enron affair were dramatic and far-reaching: the largest bankruptcy in U.S. history, $32 billion lost in market capitalization, $1 billion lost in employee retirement accounts, and the first-ever felony indictment of a public accounting firm by the Justice Department. Furthermore, the scandal, along with other recent, high profile audit failures at companies such as Waste Management and Cendant, has damaged the integrity and credibility of the public accounting profession in the eyes of senior executives and the public at large. New legislation like the Sarbanes-Oxley Act has been introduced to prevent a failure of accounting standards in the industry, changing the structure of accounting and professional services firms in the process. Explanation of Tax Shelters used by KPMG KPMG’s tax avoidance strategy involved the marketing of four tax products aimed at producing paper tax losses: Bond Linked Issue Premium Structure (BLIPS), Foreign Leverage Investment Program (FLIP), Offshore Portfolio Investment Strategy (OPIS), and the S-Corporation Charitable Contribution Strategy (SC2). Bond Linked Issue Premium Structure – targeted to individuals with significant capital gains or ordinary income of over $20 million. The purpose of the tax shelter is to create a fictitious loss that the buyer could then use to offset other income and avoid a tax liability. The investment involves a loan issued at an above-market interest rate and with a substantial loan premium to create basis and an investment in a fund traded in foreign currencies. In the article “Tax Shelters at a glance” published by the Associated Press in November 17, 2003 a description of the tax shelter is presented as follows: “The individual creates a shell corporation and contributes a percentage of the loss to be offset by the strategy. The shell corporation gets a bank loan under strict terms that include an upfront payment equal to the amount of loss that will be offset. The shell corporation and an investment bank, working together, establish a strategic investment fund. The corporation transfers the loan to the fund, which renegotiates the loan terms. The strategic investment fund uses the money for foreign currency investments. Most of the money is converted from dollars to euros and back to dollars. A very small percentage is used to buy foreign currencies whose values are pegged to the U.S. dollar”. Few months later the client will sell the currency back to the lender and claim a loss and tax deduction. A prepayment penalty is also part of the payment to the bank to cover the loan premium. On the front, the transaction seems to be legitimate where the client and the advisory firm were confident that a profit could be made on foreign currency investments. However based on the statement of facts presented in the KPMG case, the client and the advisor chose traded stocks that have suffered losses throughout the year and used those stocks to attach the tax basis, thus generating a loss which appears to be the result of bad investment decisions and not from the BLIPS tax shelter. Listed Transaction (LT #8) "SON OF BOSS" (Uses of Artificially Inflated Basis in the Partnership Setting) Notice 2000-44 Foreign Leverage Investment Program – it is targeted to individuals with a capital gain of $20 million or more. The main purpose of the tax shelter is to eliminate capital gains. The investment involves the purchase of a warrant to acquire 90% of the stock of a Cayman company, which offers profit opportunities for an active investor and at the same time, it offers access to capital at much lower costs than US banks in America. A description of the deal is included in the Statement of facts part of the lawsuit as follows: “The FLIP strategy included a loan from a foreign bank to the Cayman company. Then the Cayman Company then tu...