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November 28, 2022

Accounting News Roundup: Grant Thornton’s Reprehensibility and Common Sense for Auditors | 09.23.16

Grant Thornton's reprehensibility

Here's an interesting report from Courthouse News Service that discusses Grant Thornton losing a tax shelter case based on a leveraged distribution 301 transaction or Lev301. A Lev301 involved "a foreign corporation [borrowing] money to buy U.S. Treasury notes before transferring the notes to corporate shareholders in the U.S."

GT recommend the use of a Lev301 to its clients, the Yung family, telling them that the IRS wouldn't have a problem with its "non-taxability." Grant Thornton was wrong — dead wrong! — and the Yungs were on the hook for a boatload of taxes, penalties and interest. The Yungs sued GT and won $19.3 million in compensatory damages plus $80 million in punitive damages.

The case went through the appeals process and a judge reduced the punitive award to $20 million and the discussion around it is fascinating:

"As Grant Thornton points out, the Yungs were not economically vulnerable and suffered only an economic injury," [Judge Irv Maze] wrote. "The infliction of only economic harm can still merit a substantial penalty, especially when done intentionally through affirmative acts of misconduct.

But not all acts which cause economic harm are sufficiently reprehensible to justify a significant sanction in addition to compensatory damages."

Judge Kelly Thompson wrote a dissenting opinion, disagreeing with the reduction of punitive damages.

"After conducting a month-long trial, the trial court made extensive findings of fact regarding the reprehensibility of Grant Thornton's conduct and found Grant Thornton acted with intentional malice, trickery and deceit," he wrote. "I would defer to the trial court's factual finding regarding the degree of reprehensibility of Grant Thornton's conduct."

Wait, did GT argue that because the Yungs were rich that their actions didn't warrant the $80 million punitive damages? Isn't that reprehensible? I understand that Grant Thornton probably sells stuff to rich people that they don't need all the time, but that's not really the point. The point is, quantifying reprehensibility sounds fun. In general, I suppose ripping off rich people is far less reprehensible than ripping off middle-class people which is far less reprehensible than ripping off poor people. Apparently that equates a $60 million reduction. In any case, here's the entire court filing. I'll report back if learn a more sophisticated method.

Common sense for auditors

Earlier this week, we learned about a couple of EY auditors who crossed the independence line in some of their personal relationships with clients. In each case, you got the sense that the auditor and client involved genuinely liked each other. However, when securities laws say that you have to be independent in fact and appearance, this can get complicated when auditor and client spend time together socially. How many football games are too many football games? How much secret romance is too much secret romance? If your client makes earnings and you high-five them, is that violation?

If you're one of those form over substance people, these are the questions that keep you up at night and that you can't help but ask aloud at a conference:

Speaking at an American Law Institute conference in Washington, Michael Husich, the SEC's senior associate chief accountant, urged accountants to use a "common sense standard" in their relationships with clients to avoid jeopardizing the independence of an audit.

"I don't suspect we're going to come out with any guidance," Husich said, responding to a question about whether the SEC had an "appetite" for taking up a formal rulemaking to give clear guidance.


I could get a little cynical here, but I'm not gonna talk about how many times on a golf course a partner and a CFO can play golf and that sort of thing," he said. "It really is all about common sense and somehow trying to translate that into policies."

Naturally, some people are going to argue that common sense is subjective and while that's true, I don't think more guidance is the answer. Some audit partners are going to behave in good faith and wander into the grey area. The trick is having enough self-awareness to recognize when you've wandered too far into the grey area and trying step back from it.

IRS email scams

IRS Scams Inc. knows that it can prey on people's irrational fears of the IRS. They also seem to know that the only greater irrational fear than the IRS is ObamaCare. So naturally, the IRS has learned about a new scam that involves fake CP2000 notices being emailed taxpayers for "unpaid taxes related to the Affordable Care Act":

The fraudulent CP 2000 notices appear to be issued from an Austin, Texas address and request information regarding 2014 coverage under the Affordable Care Act. The payment voucher lists the letter number as 105C.

The bogus CP2000 notice includes a payment requesting taxpayers mail a check made out to “I.R.S.” to an “Austin Processing Center” at a P.O. box address. There is also a “payment” link within the email.

I'm sure the Business Development team at ISI will be perfecting this over the next few months. Stay vigilant!

Has Donald Trump released his tax returns?

Nope! "Senate Democrats Are Mercilessly Trolling Trump Over His Tax Returns" is the headline over at the Huffington Post and I think we're just about ready for a debate so things can finally get serious.

HAHAHAHAHAHAHAHAHAHAHA! Just kidding, this whole thing is a joke.

Partner school viewpoint: Professional credentials for accountants

For anyone out there looking to add a few extra letters behind their name, you can get tons of ideas from this University of Scranton list of the 10 best professional credentials for accountants. They range from the well-known — chartered financial analyst (CFA) and certified management accountant (CMA) — to the more obscure — certified treasury professional (CTP) and Certified Government Auditing Professional (CGAP).

In the case of CGAP, one study found that it can increase your earning potential by 40%. And last we checked, lots of you are still interested in money.

Previously, on Going Concern…

Megan Lewzyck covered #AuditorProud. I wrote about a CFO's interesting qualifications.

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