Bramwell’s Lunch Beat: Could BK Deal Put Buffett and Obama at Odds?

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Ernst & Young 2013 audit deficiency rate 49%, regulators say
Michael Rapoport of the Wall Street Journal reported on Thursday that the Public Company Accounting Oversight Board (PCAOB) found deficiencies in 28 of the Ernst & Young (EY) LLP audits it evaluated in the US audit regulator’s latest annual inspection of the Big Four accounting firm's work.

The 28 deficient audits were out of 57 audits or partial audits conducted by EY that the PCAOB evaluated – a deficiency rate of 49 percent. In the previous year, the board's inspectors found deficiencies in 25 of 52 audits inspected, a rate of 48 percent.

Among the areas in which the PCAOB found audit deficiencies were failure to perform sufficient audit procedures related to revenue recognition and accounts receivable, insufficient testing of inventory, and insufficient procedures related to insurance reserves.

A deficiency cited by the inspectors doesn't mean that the subject of the audit needs a restatement, or that the problems found remained unaddressed after the inspectors found them, Rapoport wrote. Still, the deficiencies found were significant enough that it appeared EY hadn't obtained enough evidence to support its audit opinions giving its clients a clean bill of health, the PCAOB said in the inspection report issued on Thursday.

In a statement responding to the report, EY said it was “fully committed to audit quality” and that the PCAOB's inspection process “assists us in identifying areas where we can continue to improve,” according to the article.

Buffett Burger King funds flip Obama’s inversion calculus
Billionaire Warren Buffett was an ally of President Obama during the 2008 presidential campaign and the force behind Obama’s “Buffett Rule,” designed to increase tax bills for the wealthiest Americans. In the past, he has served as a sort of unofficial adviser to Obama on business and financial matters, someone whose stamp of approval has offered political cover when the president’s been accused of being anti-business or of unfairly targeting the wealthy.

Now, the second-richest man in the United States has dented Obama’s effort to stamp out corporate inversions, Jonathan Allen, Richard Rubin, and Noah Buhayar of Bloomberg wrote earlier this week.

Buffett’s financing of Burger King Worldwide Inc.’s $11.4 billion purchase of the Canadian fast-food chain Tim Hortons Inc. challenges Obama’s argument that inversions are unpatriotic and gives defenders of the practice leverage to make their case.

The Burger King deal tests the long-held assumption of anti-inversion activists that the American public and politicians wouldn’t stand for a name-brand, consumer-facing company moving its headquarters across the US border to pay a lower tax rate, Allen, Rubin, and Buhayar wrote.

The danger for Democrats is that Buffett’s investment in the burger-fries-and-a-Coke company’s inversion might flip that calculation and make it politically easier for other corporations to follow suit without suffering repudiation from the public or the White House.

If Obama were to question the Burger King deal publicly now, it would mean putting himself at odds with Buffett, they wrote.

Hedge funds hunting clues in Treasury tax-inversion limit
In a Bloomberg article on Friday, Richard Rubin and Robert Schmidt wrote that tax lawyer Robert Wellen’s telephone keeps ringing with calls from hedge-fund executives he’s never met, who are looking for clues about the US Treasury Department’s crackdown on corporate inversions.

The barrage of out-of-the-blue queries in the past several weeks is unprecedented in his 40-year career, Wellen said. “These folks were really trying to get whatever insights they could, from whoever they could,” said Wellen, a partner at Ivins, Phillips & Barker in Washington, according to the article.

Wellen is one of many lawyers, lobbyists, and political intelligence specialists hounded by investment firms since President Obama said this month the Treasury would study action to limit inversions, Rubin and Schmidt wrote. The firms are worried about billions of dollars of trades they’ve placed on mergers, and the potential that new regulations could sour the investments.

The hedge funds’ reaction shows the difficulty of balancing the administration’s policy goal of preventing inversions with election-year politics, analysts said.

“On the one hand, by maximizing the uncertainty of regulatory action, they are trying to freeze the announcement of any further deals,” said Stephen Myrow, managing partner of Beacon Policy Advisors LLC in Washington who worked at the Treasury Department during the George W. Bush administration, according to the article. “On the other hand, once the administration shows their cards, they risk opening the floodgates” to more mergers.

Medtronic would pick up $25M in CEO’s taxes
Joe Carlson of the Minneapolis Star Tribune reported on Friday that Medtronic Inc., which plans to cover its top leaders for certain taxes they face as part of a controversial merger plan, has calculated the cost for the CEO’s tab alone at $25 million.

The Fridley, Minnesota-based medical device giant disclosed to shareholders this week that it would pay an estimated total of $63 million to compensate high-ranking executives for special excise taxes they would incur if Medtronic acquires surgical supplier Covidien and moves overseas in the process.

Medtronic officials argue that paying executives’ excise taxes – which are on top of the capital gains taxes all shareholders pay – actually puts the officers and executives on a level playing field with the rest of the company’s shareholders, Carlson wrote. Additionally, the company says its leaders wanted to evaluate the merits of the deal without facing a personal financial disincentive to proceed.

The tax payments for CEO Omar Ishrak and other top Medtronic figures have raised the ire of some shareholders – even before the amounts were known – because the company won’t be covering the significant capital-gains taxes that the deal will trigger for longtime shareholders.

“I thought it looked really bad,” said Minneapolis corporate consultant David Schall, who acts as a proxy for his father, longtime former Medtronic board member and shareholder Richard Schall, according to the article. “I thought it was disingenuous to say they were acting in the best interest of the shareholders, but then … they took care of themselves.”

Businesses are winning cat-and-mouse tax game
David Gelles of New York Times DealBook wrote on Thursday that across corporate America, companies large and small are finding new ways to address one of the business world’s oldest irritations: paying taxes.

By exploiting existing loopholes and devising new ones, some of the country’s best-known companies are making it harder than ever for the federal government to replenish its already depleted coffers. As a result, business income tax revenue remains stagnant at about 2 percent of gross domestic product even as corporate profits hit records.

Business taxes now make up less than 10 percent of federal revenue, and in some years as little as 6.6 percent. That is sharply down from the years after World War II, when about 30 percent of federal revenue came from corporate taxes, Gelles wrote.

The decline is the result of the rise of untraditional business structures, the effects of a more globalized economy, and a labyrinth of subsidies and tax credits. And though the erosion has happened gradually over decades, the surging popularity of inversions is raising concerns that an already precarious situation is growing untenable.

“There’s been a long, slow, steady decline,” said William G. Gale, co-director of the Urban-Brookings Tax Policy Center and an economic adviser to President George H.W. Bush, according to the article. “It’s a confluence of a bunch of things, and it’s increasingly difficult to figure out how to effectively tax corporations.”

Obamacare contract muddles Dem message on tax dodgers
Bernie Becker of The Hill reported on Friday that the Obama administration is employing an Obamacare contractor that was once based in the tax haven of Bermuda even as it assails corporations for lacking the “economic patriotism” to pay taxes.

Accenture was awarded a contract in January that's now grown to well over $100 million to make improvements to The company is currently incorporated in Ireland, where it moved in 2009. Before that, Accenture had set up shop in both Switzerland and Bermuda, a noted tax haven, and has been called a tax dodger by a variety of mostly Democratic lawmakers for more than a decade.

Accenture received the contract months before Obama and Democrats began targeting an increasing number of corporations that have sought to slash their tax bill by shifting their legal address abroad, known as an inversion.

Accenture argues that it’s not an inverted company because it was never organized in the United States, Becker wrote. “Accenture has never been a US-based or US-operated organization and has never operated under a US parent corporation,” James McAvoy, a company spokesman, told The Hill in a statement. “Accenture is, and always has been, a global organization.”

Still, Accenture has significant ties to the United States and acknowledges that taxes played a role in its decision to first incorporate in Bermuda, according to the article.

SEC announces $300,000 whistleblower award to audit and compliance professional who reported company’s wrongdoing
The US Securities and Exchange Commission (SEC) on Friday announced a whistleblower award of more than $300,000 to a company employee who performed audit and compliance functions and reported wrongdoing to the SEC after the company failed to take action when the employee reported it internally.

It’s the first award for a whistleblower with an audit or compliance function at a company.

“Individuals who perform internal audit, compliance, and legal functions for companies are on the front lines in the battle against fraud and corruption. They often are privy to the very kinds of specific, timely, and credible information that can prevent an imminent fraud or stop an ongoing one,” Sean McKessy, chief of the SEC’s Office of the Whistleblower, said in a written statement. “These individuals may be eligible for an SEC whistleblower award if their companies fail to take appropriate, timely action on information they first reported internally.”

This particular whistleblower award recipient reported concerns of wrongdoing to appropriate personnel within the company, including a supervisor. But when the company took no action on the information within 120 days, the whistleblower reported the same information to the SEC. The information provided by the whistleblower led directly to an SEC enforcement action.

The SEC’s whistleblower program rewards high-quality, original information that results in an SEC enforcement action with sanctions exceeding $1 million. Whistleblower awards can range from 10 percent to 30 percent of the money collected in a case. By law, the SEC must protect the confidentiality of whistleblowers and cannot disclose any information that might directly or indirectly reveal a whistleblower’s identity.

Quick Links:

  • PwC is getting into the virtual food service business (Going Concern)
  • KPMG vice chair thinks the future of audit includes 100 percent testing (Going Concern)
  • Baker Tilly in merger with Scottish firm (Accountancy Age)
  • Sikich jumps 798 spots in the Inc. magazine 5000 (Sikich)
  • Eroding tax base or maximizing shareholder value? (Audit Analytics)
  • Is Burger King’s move to Canada a raw deal for US taxpayers (Fortune)
  • Lower corporate tax rates. Now. (Washington Post)
  • Who’s better at dodging taxes – Wall Street or Main Street? (MarketWatch)
  • The simple solution to corporate inversions (Tax Foundation)
  • Buffett’s ‘Burger Tim’ inversion adds tax bonus for shareholders – think free curly fries (Forbes)
  • Tax Court sides with IRS in tax treatment of frequent flyer miles issued by Citibank (Forbes)
  • Tea Party Patriots Inc dodging tax on e-mail fees? (Forbes)
  • Credit cards, the IRS, Form 1099-K and the $19,399 reporting hole (Forbes)
  • ‘Fake’ IRS scandal spawns real coverup (USA Today)
  • Analysts ask IRS to revert to broader definition of REIT-eligible real property (Bloomberg BNA)
  • Swiss banks lost $383 billion funds amid probes, PwC says (Bloomberg)
  • Japan’s tax increase puts Abenomics at risk (Wall Street Journal)
  • A carbon tax everyone can love (US News and World Report)
  • Tester to Clapper: Ensure your workers pay taxes (The Hill)
  • Lower tax rates vs. targeted tax credits (The Federalist)
  • CBO spending projections map the coming fiscal battle (TaxVox)
  • Yep, son, we have met the enemy (Tax Analysts)
  • ‘Moral’ tax filing wraps up IRS Orlando Tax Forum (Don’t Mess With Taxes)
  • 5 signs that an ‘IRS’ caller is a crook (Don’t Mess With Taxes)
  • Tax preparer ethics: Miscellaneous deductions (Dinesen Tax Times)
  • Lawmakers OK bill to remove tax deduction for pro sports owners’ fines (Los Angeles Times)
  • Quinn, Rauner trade barbs on IDOT, taxes (Chicago Tribune)
  • NH Supreme Court upholds education tax credit law (Associated Press)
  • Claims Court awards tax refund check under Check Forgery Insurance Fund (Tax Litigation Survey)


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