A prominent political couple in California are seeking $34 million from Arthur Andersen LLP, alleging the now-defunct firm sold them a tax shelter it knew might be outlawed by the Internal Revenue Service.
Assemblywoman Carol Liu and her husband, Michael Peevey, president of the California Public Utilities Commission, contend that Arthur Andersen withheld the IRS information from them, the Pasadena Star-News reported. They now face more than $2 million in penalties. The couple has already paid $225,000 to defend an audit by the IRS, which started investigating the tax shelter in March 2003.
Troubles began after Liu made a $1 million charitable donation to the University of California at Berkeley. Arthur Andersen advised the couple to buy a trust, called a "Forward Out," that would give the couple a bigger tax break than the commonplace charitable remainder annuity trust. The firm set up the trust at a cost of $250,000, two months before the Treasury Department determined that certain charitable gift strategies violated the tax code. Arthur Andersen never shared that information with Liu and Peevey, the lawsuit says.
Andersen also under scrutiny in England
The former accounting giant, which collapsed in 2002 after the Enron bankruptcy scandal, is also facing disciplinary action in England.
The accounting profession’s watchdog group, the Joint Disciplinary Service (JDS), fined the firm £400,000 and ordered it to pay £700,000 in costs for failing to uncover fraud at DIY group Wickes, according to the Financial Times of London.
"The quality of evidence that Andersen based its audit opinion on was wrong," said JDS Executive Counsel Chris Dickson. "They didn't look properly at the underlying documents but simply relied on letters and representations from the company."
Richard Simmons and David Whitmore, former partners, were each fined £25,000 for their failures on the Wickes audit.
The company overstated profits by more than £50m between 1992 and 1995 "by arranging unrealistic rebates with suppliers and booking them in advance," the newspaper reported.
The rebates were represented as unconditional when many actually relied upon a number of factors with suppliers, such as volume targets being reached.
The JDS said this practice was fraud designed to mislead "shareholders, the auditor and the market about the true performance and value" of the DIY chain.
While Andersen's Eindhoven office found the accounting problem in 1995 and corrected it, the firm did not look further into the matter, even though the same fraudulent system was found that same year in Manchester.
"No one thought to look further across the Wickes empire," Dickson said. "They should have checked the source documentation."