Bramwell’s Lunch Beat: New York Levies Penalties Against PwC
Deloitte CEO Joe Echevarria to retire to pursue public service
Michael Rapoport of the Wall Street Journal reported that Deloitte LLP CEO Joe Echevarria plans to retire later this month to pursue his interest in public service, the Big Four accounting firm announced on Friday.
Deloitte CFO Frank S. Friedman was named CEO by the firm's board of directors until the completion of Deloitte's formal leadership election, which is held every four years and is currently underway.
Echevarria, 57, who has been at Deloitte since 1978, was elected in 2011 to a four-year term as Deloitte's CEO – standard for CEOs of the major accounting firms, Rapoport noted – but decided not to stand for another term and will be leaving about nine months before his current term is up. Deloitte LLP is the parent of audit firm Deloitte & Touche LLP and of Deloitte Consulting LLP.
In a statement issued by Deloitte, Echevarria said he has “determined that this is the right time in my life to pursue my passion for public service.” He has been active in the past with groups like Fix the Debt and the Business Roundtable. He didn't mention any specific future plans on Friday other than continuing as co-chair of My Brother's Keeper, a White House initiative to assist minority boys and young men that Echevarria leads along with former basketball star Earvin “Magic” Johnson.
Friedman has been with Deloitte for 34 years and has been CFO since 2011. The firm is in the midst of its regular CEO-election process, and it wasn't clear on Friday whether Friedman would be only an interim CEO or chosen for a full four-year term of his own, Rapoport wrote.
[For some additional reading, the Kansas City Star wrote an article on Frank Friedman, Deloitte’s CFO who is based in Kansas City and who was named CEO on Friday. “I am truly humbled to serve as CEO,” Friedman said, according to the article. “It is an honor to have the opportunity to lead Deloitte – 65,000 people who every day deliver measurable and enduring impact on behalf of our clients, communities, and society.”
PwC to settle with New York regulator over consulting for Japanese bank
Rapoport also wrote on Sunday for the Wall Street Journal that PricewaterhouseCoopers LLP (PwC) will pay $25 million and be banned for two years from some consulting work to settle New York state regulators' allegations that the accounting firm mishandled its work for Bank of Tokyo-Mitsubishi UFJ.
The New York State Department of Financial Services alleges that PwC watered down an anti-money-laundering report it did for the Japanese bank that was submitted to regulators. PwC said Sunday evening that it has agreed to the fine and the ban, which prevents one of its units from performing certain consulting work for New York-regulated banks.
Rapoport noted that the settlement, which was first reported on Sunday evening by the New York Times, is expected to be announced publicly on Monday, according to a person familiar with the matter.
Regulators are citing a number of changes – softenings, the regulators believe – that PwC made in a report to regulators over Bank of Tokyo-Mitsubishi UFJ's dealings with Iran and other countries subject to US economic sanctions. For instance, the initial version of PwC’s report said it would have used a “different approach” to its project had it known about one of the policies the bank was following, Rapoport wrote. But the final version of the report submitted to regulators said that wouldn’t have made a difference.
PwC maintains that the changes in its report were made in response to comments from the bank and the bank's attorney, and that the final version of the report submitted to regulators contained all the substantive information needed, according to the article.
[For additional reading, New York Times DealBook highlights specific changes that the Bank of Tokyo-Mitsubishi's lawyers and executives pressured PwC into making.]
For the first time in four years, state revenues declined in the first quarter
According to a new tax-estimate report from the Rockefeller Institute of Government at the State University of New York, state tax revenues dropped in the first quarter of the year for the first time since the end of 2009 – and early data suggest the decline continued in the second quarter, Niraj Chokshi of the Washington Post wrote on Friday.
But states did see this coming. That’s because it represents the cascading effects of the fiscal cliff, the end-of-2012 fight over spending cuts and tax hikes, Chokshi noted. Many (wealthy) taxpayers sold stocks and collected income on bonuses in 2012 rather than 2013 to avoid impending higher taxes, which resulted in what the report calls a “trough” in capital gains in 2013.
State tax revenues dropped 0.3 percent, unadjusted for inflation, in the first quarter of the year compared to the same quarter in 2013, suggesting better fiscal conditions than portrayed in a June tax release from the US Census Bureau, the report finds, according to the article. Individual income taxes were down 1.2 percent, but sales and corporate taxes were up 1.7 percent and 1.4 percent, respectively.
Three states saw double-digit growth in overall tax revenues from the first quarter of 2013 to the same period this year. Revenues grew the most in Nebraska, at 22.3 percent, followed by 12.1 percent in Wyoming and 11.8 percent in Louisiana, Chokshi wrote. Three states posted double-digit declines. Alaska saw revenues drop 67.8 percent, followed by Minnesota’s 16.3 percent and Michigan’s 14.2 percent decline.
Holding auditors blameless
Several media outlets, including the New York Times, reported last week that an arbitration panel of three former judges found no basis for a malpractice claim against Ernst & Young (EY), the auditor of Lehman Brothers. The panel held that Lehman and its former executives were “more culpable than EY” for accounting maneuvers that misled investors about the firm’s financial condition before its catastrophic collapse in 2008.
In an op-ed on Friday, the New York Times editorial board wrote that the judges’ ruling translates to: “When it comes to cooking the books, not being as guilty as someone else is the same as being blameless.”
“That sounds appalling, and it is. But it echoes a misguided law from 1995 that set an exceedingly high bar for holding outside auditors liable – along with corporate management – for accounting fraud, a law that has encouraged slippery audits,” the op-ed stated.
The New York Times editorial board wrote that EY has argued all along that Lehman’s accounting tactics, deceptive or not, complied with US Generally Accepted Accounting Principles.
“That may be so, but it is a dubious defense for one of the biggest firms in a profession that is presumably based on integrity,” the editorial board continued. “The problem is larger than Ernst and goes beyond this specific case, which was brought by the holding company charged with recovering and selling Lehman’s assets and paying off creditors. The big auditing firms are virtually never the first to uncover and publicly report financial frauds; credit for that goes to the press, whistle-blowers, hedge funds, independent research firms, bankruptcy trustees, or regulators. With each failure by auditors to sound warnings, it becomes increasingly clear that the investing public is being shortchanged when it comes to the reliable information it needs to make sound investing decisions.”
White House betting ’14 midterm elections on economic patriotism
Justin Sink of The Hill wrote on Sunday that the White House is seeking to amp up the Democratic base this fall by criticizing corporations for abandoning the United States to lower their tax bill.
It’s a return to economic populism months for a White House that has repeatedly flirted with the theme, but sometimes been distracted by other pressing domestic and international affairs. Sink wrote that Democrats believe the issue could help their party hold on to its majority in the Senate, which Republicans are hoping to take over.
“Let’s rally around an economic patriotism that says, instead of giving more tax breaks to millionaires, let’s give tax breaks to working families to help pay for child care or college,” President Obama said during a speech in Texas last month, according to the article. “Instead of protecting tax loopholes that let corporations keep their profits overseas, let’s put some of that money to work right here in the United States rebuilding America.”
Democrats see the tax issue as a political winner that allows the president to side with middle-class taxpayers and against corporate executives who can be painted as disloyal and unpatriotic. They think it will be difficult for Republicans to defend the practice.
“There is still a great amount of discomfort in the American electorate around the economy and particularly anger with Wall Street and corporate chiefdoms who seem to be getting a better deal than everybody else,” said Democratic strategist Jamal Simmons, according to the article. “Any time the White House can channel that into policy actions, that's good.”
- Here’s further proof that accounting firms need a charge code for “wasting time on Internet” (Going Concern)
- The possibility remains the FASB could turn their simplification initiative into a giant Charlie Foxtrot (Going Concern)
- Audit tenders to double (economia)
- PwC inundated by job applications (economia)
- Corporate foreign tax moves have bedeviled US for decades (Reuters)
- When companies flee US tax system, investors often don’t reap big returns (Reuters)
- Can Obama slow corporate inversions? Yes he can. (TaxVox)
- Demagoguing the ‘I’ words (Tax Analysts)
- Ditching the US for lower taxes doesn’t always pay off (ThinkProgress)
- America needs more tax inversion (Forbes)
- How Obamacare could make filing taxes a nightmare (Vox)
- Pot tourism’s potential tax payoff for states with legal weed (Don’t Mess With Taxes)
- Elvis estate seeks tax breaks for Graceland expansion (Don’t Mess With Taxes)
- Tax Court rejects argument that TMP under investigation is automatically disqualified (Tax Litigation Survey)