Grand Jury Investigating Ernst & Young Tax Shelter Sales

Federal investigators have launched a criminal investigation into Ernst & Young’s tax shelter practices, despite the $15 million settlement the firm reached on the matter last year with the Internal Revenue Service, the Wall Street Journal reported.

A grand jury has been impaneled and it is believed the investigation is in its earliest stages. Often charges do not result from grand jury investigations. A separate criminal probe is pending against fellow Big Four accounting firm KPMG LLP in regard to that firm’s tax shelter sales practices.

The shelters were promoted during the stock market heyday of the 1990s and it is believed they diverted tens of billions of dollars from Treasury coffers, the Journal reported.

"As we have done in other inquiries regarding tax shelters, we are cooperating fully with this investigation," Ernst spokesman Charles Perkins told the Journal, refusing to comment further. It is unclear how broad the investigation's scope is.

Earlier this year, Ernst was suspended by the SEC from accepting any new audit clients for six months. The unusually long suspension was the firm’s punishment for engaging in a lucrative business deal with audit client PeopleSoft, in violation of auditor independence rules, the Journal reported.

The industry were surprised by the Ernst & Young grand-jury investigation in light of the settlement last year reached between Ernst and the IRS, which had alleged Ernst had failed to comply with rules requiring that tax-shelter promoters register certain tax strategies with the government and maintain lists of investors who participate in them, the Journal reported. Ernst admitted to no wrongdoing as part of the settlement.

In testimony in October before a Senate committee investigating corporate tax shelters, IRS Commissioner Mark Everson singled out Ernst for praise, the Journal reported. "We are pleased that Ernst & Young has cooperated fully with the IRS in resolving these matters," he said at the hearing. "This represents a real breakthrough and is a good working model for agreements with practitioners."

Ed Ketz, an accounting professor at Pennsylvania State University, told the Journal he "cannot imagine" that the U.S. government would indict another accounting firm, due to concerns about the damage that could have on global financial markets, especially in the wake of the demise of Arthur Andersen. As for the latest development at Ernst, "It's another black eye for them," he said. "And the question for us is: How many more black eyes can they take before it has some serious impacts on their relationships with their clients?"

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