Bramwell’s Lunch Beat: PCAOB Tags Ex-PwC Partner with Penalties

Swiss banks threaten freeze on US accounts over tax evasion
James Shotter of the Financial Times reported on Monday that several Swiss banks have threatened to freeze American clients’ accounts unless they prove they are, or take steps to become, tax compliant, as the country’s lenders hurry to resolve a tax evasion dispute with the United States.

The moves – made by a number of banks, according to three people familiar with the situation who did not disclose the identity of the banks involved – come before a deadline at the end of July for banks in a program set up by the US Justice Department last year to show which American clients conform to US tax requirements.

By the end of this month, banks have to provide “mitigating” information – for example that certain accounts had been declared – or until September 15 to show that clients disclosed their accounts themselves, at the urging of their bank, through the US Offshore Voluntary Disclosure Program.

PCAOB announces settled disciplinary action against PwC partner for audit failures
On Monday, a former partner at PricewaterhouseCoopers LLP (PwC) was barred by the Public Company Accounting Oversight Board (PCAOB) from associating with a registered public accounting firm for three years after violating auditing rules and standards during the Big Four firm’s 2007 audit of ArthroCare Corp., a maker and supplier of medical devices.

Violations against Randall A. Stone, CPA, of Austin, Texas, who was the partner in charge of the 2007 audit, included ignoring or failing to properly address numerous indicators of improperly recognized revenue in significant unusual transactions.

The order bars Stone from associating with a registered public accounting firm, with the right to petition the PCAOB to remove the bar after three years. He also was fined $50,000. Stone, 51, who retired from PwC at the end of last month, consented to the order without admitting or denying the findings.

The PCAOB began the disciplinary proceeding against Stone in December 2012, but it remained nonpublic until now, as required by the Sarbanes-Oxley Act. The board found that Stone ignored or failed to properly evaluate numerous indicators that should have alerted him to the possibility that ArthroCare was improperly recognizing revenue on its 2007 sales of medical devices to DiscoCare Inc. Such indicators included unusual pricing and payment terms, quarter-end sales spikes, and evidence that ArthroCare may have funded DiscoCare’s purchases through monthly service fee payments. Sales to DiscoCare helped ArthroCare meet its revenue forecasts for 2007.

“Revenue often is a key metric for public company investors and is a financial reporting area prone to manipulation by management,” Claudius B. Modesti, director of PCAOB enforcement and investigations, said in a written statement. “When an auditor is confronted with multiple indicators of problematic revenue recognition, as happened here, he or she must get to the bottom of the relevant issues, including digging into management’s representations.”

Stone also violated PCAOB rules and standards in auditing ArthroCare’s accounting for its acquisition of DiscoCare in December 2007. He failed to exercise due professional care and skepticism when, among other things, he agreed with the company’s proposed accounting for the acquisition without adequately assessing whether such accounting treatment complied with US Generally Accepted Accounting Principles, according to the PCAOB.

In addition, the board found that Stone violated PCAOB rules and standards in authorizing PwC’s consent to incorporate its previously issued 2007 audit report in ArthroCare's June 2008 Form S-8 registration statement without first completing a reasonable subsequent events investigation. When Stone authorized PwC’s consent, he was aware of new allegations of impropriety concerning ArthroCare’s relationship with DiscoCare in 2007, and he knew that ArthroCare and PwC were continuing to assess those allegations, according to the PCAOB.

Will Walgreen’s Chicago board members vote for a move?
Two years ago, two prominent Chicago businessmen resigned their board seats at Aon Corp. rather than endorse the commercial insurance brokerage’s tax-motivated move of its corporate headquarters to London from Chicago. Now, five Walgreen Co. directors with Chicago ties are faced with a similar dilemma as they contemplate whether to ship off the headquarters of the third-largest publicly traded company in Illinois, wrote Steve Daniels of Crain’s Chicago Business.

Deerfield, Illinois-based Walgreen is in the second stage of a two-part merger with Switzerland’s Alliance Boots GmbH. Its executives recently told restless investors it will outline its plans for Alliance Boots, including whether to place its headquarters in Switzerland, in late July or early August. Reincorporating in Europe could slash the drugstore chain’s income tax bill by hundreds of millions of dollars.

Daniels noted that among the more fearsome advocates of relocation is Alliance Boots Executive Chairman Stefano Pessina, now Walgreen’s largest single shareholder. And it seems that if Pessina doesn’t get his way, Walgreen CEO Greg Wasson may lose his job.

The decision won’t be easy for Wasson and the four other directors on Walgreen’s 13-member board who are Chicago business leaders and “rub shoulders with the city’s other chieftains,” Daniels wrote.

“They face being asked to explain why they voted to pack up the headquarters of a company that employs about 5,000 in Deerfield and another 12,700 in area stores and whose Chicago roots date to 1901,” he continued.

30 years of companies abandoning the US for lower taxes, in one chart
The Washington Post Wonkblog has the chart here.

Based on data from the Congressional Research Service, nearly twice as many companies (47 in all) have shifted their corporate tax-paying duties abroad since 2003, or almost double the amount that did in the 20 years prior, because of corporate tax breaks. And the acceleration is only slated to continue: At least another 12 are currently planning to do the same.

“There are a number of advantages inherent in reincorporating, including the likelihood of more fluid overseas acquisitions and lower borrowing rates due to increased cash piles,” Wonkblog reporter Roberto A. Ferdman wrote on Tuesday. “But when a company reincorporates, what it's really doing is shifting its corporate citizenship; and when a company shifts its corporate citizenship, what it's really doing is trying to pay less in taxes. America's dreaded 35 percent corporate tax rate, as we've noted before, is plenty higher than that of, say, the United Kingdom, which hovers closer to 20 percent.

“Since reincorporating outside of the United States is not only perfectly legal but also likely to prove fairly lucrative, it's hard to blame any company capable of making the move for at least trying to do so,” he continued. “It has, after all, resulted in the stockpiling of some $1 trillion (paywall) in cash, which is now believed to be sitting overseas as a result of such maneuvers.”

GAO: IRS misleads audited taxpayers
According to a new report from the US Government Accountability Office (GAO), the IRS tells taxpayers facing an audit that it’ll get back to them quickly and then often falls short of that goal, Bernie Becker of The Hill wrote on Monday.

The GAO said the IRS has “misled taxpayers by providing unrealistic time frames,” saying it would get back to audited taxpayers within 30 to 45 days. The watchdog also said the IRS consistently takes several months to respond to correspondence audits, which are done through the mail and account for about three-quarters of the audits conducted by the tax agency, Becker wrote.

In all, the GAO said the IRS is behind on more than 50 percent of the correspondence that taxpayers send in to deal with audits.

Senate Democrats call for quick action on highway patch
A trio of Democratic senators called for quick action this month on agreeing to keep funds flowing to transportation projects through the end of the year as bipartisan, bicameral negotiations continue on finding a way to pay for the patch, Humberto Sanchez of Roll Call wrote on Monday.

“We have to. It is a necessity for the economy of this country, for our infrastructure, and for everything else, to come to an agreement before the [highway] trust fund runs out,” Senator Charles Schumer (D-NY) said on a conference call, according to the article. “Our purpose today is to urge both sides to come together, to put down any partisan objection, to come to a compromise and get this done in the short term, and then we can try to work on a longer plan later. To let the trust fund run out at a time when we need jobs, we need the economy going, would be a disgrace.”

Congress has to come up with about $10 billion to plug the shortfall needed to fund transportation projects through the end of the year, given that the Highway Trust Fund – the collection of gas tax receipts doled out to states to pay for surface transportation projects – is expected to run out of money this month, Sanchez wrote.

And funding for transportation programs would shrink after September 30, the end of the fiscal year. A short-term fix would give Congress a chance to work out a multiyear transportation authorization with a new funding mechanism or a bill that doesn’t provide as much aid.

Quick Links:

  • Crumbs Bake Shop just fulfilled auditor Rothstein Kass’ going concern prophecy (Going Concern)
  • The PCAOB hopes to check audit partner naming off its to do list this year (Going Concern)
  • The real reason millennials can’t find work: They stink! (Going Concern)
  • SEC names Thomas J. Krysa as associate regional director in Denver office (SEC)
  • How to win billions in federal contracts on a permanent tax holiday (Bloomberg)
  • Qiagen is next deal candidate with tax allure: Real M&A (Bloomberg)
  • Positively un-American tax dodges (Fortune)
  • Tax reform to end inversions and grow economy/jobs (Forbes)
  • Tax reform: Restoring booming economic growth, and the American dream (Forbes)
  • Defining net investment income under the final 3.8-percent investment tax regulations (Forbes)
  • A perfect storm: Net neutrality and the end of the Internet tax moratorium (Forbes)
  • How a big SUV and a home office can cut your tax bill (MarketWatch)
  • Making saving incentives more equitable (TaxVox)
  • Will states get a multibillion-dollar windfall from corporate tax reform? (Tax Analysts)
  • 5 easy tax tasks to take care of in July (Don’t Mess With Taxes)
  • Preparation is key as severe weather seasons overlap (Don’t Mess With Taxes)
  • Fight in Bay Area; San Francisco, Berkeley try to become first US cities to impose soda tax (US News and World Report)
  • Kansas was supposed to be the GOP’s tax-cut paradise. Now it can barely pay its bills. (Vox)
  • Cautious optimism on final passage of cigarette tax (Philadelphia Daily News)
  • Moss Adams announces new health care director and hospital specialist (Moss Adams)

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