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If you can get away with tax cheating, is it malpractice for your CPA to make you stop?
A Massachusetts CPA firm found out a new client was using a lame old trick. The S corporation had paid out $1 million to its owner over the years without putting it on a W-2 or treating it as a distribution from the company. Instead, the company every year booked it as a “loan” to the owners – a loan with no note, no interest rate, no security, and no repayments.
This is a time-dishonored way for people who carelessly suck cash out of a corporation to try to avoid the tax consequences – though it is less common in S corporations. It normally fails if the IRS figures it out.
The CPAs told the client that the “loan” should be reclassed as “wages” on the 2002 return to clean it up. The client owner was not excited, and talked to a lawyer to see if there was another way. After the first lawyer failed to satisfy, she talked to a second lawyer, who agreed with the CPA. The client reluctantly filed an amended return, and the owner found herself with a $500,000 tax lien.
At a national firm where I once worked, an audit partner would go from one tax person to another until he found one who told him what he wanted to hear. The client here took that approach, eventually finding a practitioner willing to prepare the 2002 return the old way. That was enough to get the client to file another amended return claiming a refund and to sue the old CPA for malpractice. That might have been a bad decision, in light of this reaction from the astonished judge:
It is surprising that Plaintiffs had the temerity to bring this lawsuit. The complaint was clearly filed too late. The record, mainly as a result of Plaintiffs’ failure to file long-overdue tax returns, is utterly insufficient to demonstrate damages. Most importantly, it is clear that Plaintiffs for many years enjoyed over $1,000,000 in income without paying any taxes on it, and they accomplished this by filing a tax return that improperly characterized the monies they received as a loan. It is close to ludicrous to claim that, by advising Plaintiffs to amend the 2002 tax return to conform with what the law and good accounting practice required, Defendants were being negligent. On the contrary, they were serving their clients ethically and well.
The judge also implied that the client might have been unwise in calling attention to the matter by filing the suit:
As a result of behaving professionally, Defendants have found themselves slapped with this expensive lawsuit. That undeserved headache, at least, is now over. The court can only hope that the IRS and the state authorities will make sure that Plaintiffs now proceed to do what everyone who enjoys the privilege of living in our beloved country is required to do: pay their fair share of taxes.
In other words: come and get ‘em, IRS!
In a world full of charlatans, it can be tough out there for CPAs who try to do the right thing. When you do, it’s nice to know at least one judge has your back.
The Notre Dame/Deloitte Center for Ethical Leadership will focus on advancing ethical leadership in business, including research, thought leadership and the dissemination of ethics-related content to the business community in the United State and around the world, the university announced Monday.
The center is being established with a major gift from Deloitte LLP, a private professional services company, according to the university. The amount of the gift was not disclosed.
Presumably portions of the curriculum will educate students on how to piece together your spouse’s new hobby with insider trading activity.
Namely, he violated Berkshire’s code of business conduct and ethics and violated his duty of candor to the WB, Munger and the rest of the company.
Last month we told you about the break up of Frazer Frost, a firm that was born out of the combination of Moore Stephens Wurth Frazer Torbet, LLP and Frost, PLLC. Turns out, the announcement made in November 2009 left out the part that it was just a ‘trial merger’ and after a year, they scrapped it for various reasons that included a) a ‘culture clash’ b) ‘issues in the Chinese reverse mortgage practice’ and c) well, those first two are pretty bad.
While it’s unfortunate when these things don’t work out, it would be assumed that everyone working at the firm would be acutely aware of the situation. A merger doesn’t exactly qualify as a “minor administrative issue” that gets overlooked. Nevertheless, a tipster sent us the following picture that appeared on page 48 of the December issue of Celebrate Arkansas.
Judging by this ad, you might get the impression that Frazer Frost was in fact still a firm and if one visits www.frazerfrost.com that’s when it gets hella-confusing:
Moore Stephens Wurth Frazer Torbet, LLP and Frost, PLLC are moving to resume operations as separate entities, as existed prior to their combination in January 2010. The combined firm, Frazer Frost, LLP, will continue to exist as a legal entity until the separation has been completed. It continues to be the policy of both firms not to comment publicly on client, personnel, or other internal matters.
Maybe we’re a little slow but if the two firms are “moving to resume operations as separate entities” but “The combined firm, Frazer Frost, LLP, will continue to exist as a legal entity until the separation has been completed,” we interpret that as “Frazer Frost is still technically a firm but in reality, it’s only a matter of time until we’re not.” It’s seems like a bad breakup where two people continue living together in a tense, awkward environment where way uglier shit gets said than during the actual break-up but they’re both stuck in this god-awful situation until somebody finds a new apartment.
Regardless, placing an ad in a periodical could be construed as misleading but that’s just us. If someone at the firm can explain it to us, we’ll be here. While we wait, if you’ve got thoughts on whether this ad is perfectly hunky dory or a little dubious, share below.
~ Update includes clarification of partner’s employment status and statements from accused’s attorneys via MarketWatch.
~ Update at circa 7:20 pm ET includes statement from Deloitte
If you thought all this insider trading fun was just for hedge funds you would be sorely mistaken. Deloitte seems to have another case of a partner who can’t seem to control himself when he gets some insider info. Earlier this year, former Deloitte Vice Chairman Tom Fla > shelled out $1.1 million to settle charges with the SEC.
This time around, it’s still a family affair – husband, wife, wife’s sister and brother-in-law job – and it went overseas:
The Securities and Exchange Commission today charged a former Deloitte Tax LLP partner and his wife with repeatedly leaking confidential merger and acquisition information to family members overseas in a multi-million dollar insider trading scheme.
The SEC alleges that Arnold McClellan and his wife Annabel, who live in San Francisco, provided advance notice of at least seven confidential acquisitions planned by Deloitte’s clients to Annabel’s sister and brother-in-law in London. After receiving the illegal tips, the brother-in-law took financial positions in U.S. companies that were targets of acquisitions by Arnold McClellan’s clients. His subsequent trades were closely timed with telephone calls between Annabel McClellan and her sister, and with in-person visits with the McClellans. Their insider trading reaped illegal profits of approximately $3 million in U.S. dollars, half of which was to be funneled back to Annabel McClellan.
The UK Financial Services Authority (FSA) has announced charges against the two relatives — James and Miranda Sanders of London. The FSA also charged colleagues of James Sanders whom he tipped with the nonpublic information in the course of his work at his London-based derivatives firm. Sanders’s tippees and clients made approximately $20 million in U.S. dollars by trading on the inside information.
So not a bad haul. The kicker is, Annabel was also employed at Deloitte, working in the London, San Jose and San Francisco offices. The McClellans provided information to the Sanders on several companies including Kronos, Inc., aQuantive, Inc. and Getty Images.
The SEC brass gave their standard scolding. First, Enforcement Chief, Robert Khuzami, “The McClellans might have thought that they could conceal their illegal scheme by having close relatives make illegal trades offshore. They were wrong.”
And San Fran Director Marc Fagel, “Deloitte and its clients entrusted Arnold McClellan with highly confidential information. Along with his wife, he abused that trust and used high-placed access to corporate secrets for the couple’s own benefit and their family’s enrichment.”
But the real story here is the second instance of insider trading charges against a Deloitte partner this year. The firm successfully sued Tom Flanagan back in January but you have to wonder if there isn’t some flaw with the firm’s internal oversight. Not long after the Flanagan suit, we reported on the 475 reprimands for internal noncompliance in 2009. Those reprimands did not mention insider trading specifically but over 200 of them were related to independence violations. Pattern? You can weigh in below.
Anyone with any knowledge on this story is invited to get in touch with us.
as it is not clear if there has been any internal repercussions yet. Messages (including voicemail, carrier pigeon and morse code) left with Deloitte have not been returned (see statement below).
UPDATE: McClellan’s attorneys are not amused by the SEC’s little stunt:
Lawyers for Arnold McClellan denied charges Tuesday by the Securities and Exchange Commission that the former Deloitte Tax LLP partner was involved in a big insider trading scheme. “Arnold McClellan denies the SEC’s claims and will vigorously contest them,” Elliot Peters and Christopher Kearney of Keker & Van Nest LLP said in a statement on behalf of McClellan. “He did not trade on insider information, and there will be no evidence that he passed along any confidential information to anyone.” McClellan “had no financial incentive to commit the actions alleged,” the lawyers added. “He is a conscientious, law-abiding professional with a 23-year unblemished track record of client service at Deloitte to prove it. We will see the SEC in court.”
And just to clarify, McClellan is no longer with Deloitte, leaving the firm in June of this year. Deloitte spokesman Jonathan Gandal emailed us the firm statement (see below)
still hasn’t returned our call (busy day, right?) but managed to give a statement to and was quoted by Reuters, saying that he was “shocked and saddened” by the allegations and “If the allegations prove to be true, they would represent serious violations of our strict and regularly communicated confidentiality policies.”
UPDATE 2: Here is the full statement from Deloitte:
“We are shocked and saddened by these allegations against our former tax partner and members of his family. If the allegations prove to be true, they would represent serious violations of our strict and regularly communicated confidentiality policies. Deloitte is committed to safeguarding non-public client information and has cooperated with the SEC throughout its investigation. The SEC does not allege any wrongdoing by Deloitte in this unfortunate matter.”
He really should have stuck around. He won on a couple of ’em, which is probably better than most people were expecting.
Of course Chuck isn’t going quietly:
How can anyone have confidence in the decision of the Ethics Subcommittee when I was deprived of due process rights, right to counsel and was not even in the room? I can only hope that the full Committee will treat me more fairly, and take into account my entire 40 years of service to the Congress before making any decisions on sanctions.
The Committee’s findings are even more difficult to understand in view of yesterday’s declaration by the Committee’s chief counsel, Blake Chisam, that there was no evidence of corruption or personal gain in his findings.
From here forward, it is my hope that the full Ethics Committee will take into consideration the opinion of its chief counsel as well as the statement by Rep. Bobby Scott, a member of its investigatory subcommittee who said that any failings in my conduct were the result of “good faith mistakes” and were caused by “sloppy and careless recordkeeping, but were not criminal or corrupt.”
Charlie Rangel Has Heard Enough