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Professionalizing the Tax Accounting Profession: Fulfilling Public-Interest Reporting Responsibilities

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Accounting for the Public Interest

Part of the book series: Advances in Business Ethics Research ((ABER,volume 4))

Abstract

Recent events in the tax accounting profession such as the marketing and use of aggressive tax shelters illustrate that the tax accounting profession has lost its focus on public interest responsibilities which anchors the profession. This chapter first establishes the importance of a professional public interest foundation by outlining how such a professional foundation ideally provides a necessary anchor for the tax accounting profession. We next move from the ideal to the actual and use the fraud triangle to examine how the current tax accounting profession has strayed from a professional foundation focused on public interest responsibilities. We use the Barley and Tolbert (Org Stud 18:93–117, 1997) sociology model to understand structural change and propose suggestions for facilitating professional, public-interest focused changes in the tax accounting profession.

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Notes

  1. 1.

    One example of this might be seen in the role of the PCAOB which serves to limit the professional autonomy of professional accounting firms.

  2. 2.

    We present the fraud triangle elements with opportunity first followed by incentives and rationalization. This maintains consistent parallels and symmetry with our proposed practical educational model in Sect. 2.5.1 and presented in Fig. 2.4. This is also consistent with Stuebs (2010) and Stuebs and Thomas (2011). We recognize that the auditing literature often presents the fraud triangle in a different order with incentives first followed by opportunity and rationalization.

  3. 3.

    One example of the way that a transaction complied with the letter of the law but not the spirit of the law can be seen in the bond linked issue premium structures (BLIPS) that were sold by KPMG. Hosmer (2008) provides a detailed overview of the way that these transactions operated. Essentially, the taxpayer would take a $50 million 7 year loan with a very high interest rate. As compensation for the excessively high interest rate, the investment bank would provide an offsetting “premium” of $20 million. The benefit of the premium arrangement was that it was classed as equity rather than a liability (because it was not strictly speaking a loan) but at the same time the taxpayer avoided treating it as income because of the risk of forfeiture. Ultimately, when the taxpayer terminated the 7-year $50 million loan, the bank required repayment of the $20 million premium. This resulted in the taxpayer being able to claim a loss of $20 million. There is little doubt that the loss is a paper loss only and that the transaction lacks economic substance. The only real cost is to the tax system. Accordingly, it is difficult to see that the professionals who developed and sold such products were acting in a manner consistent with their public interest obligations.

  4. 4.

    Although it is true that all pricing invariably takes into account future risks, we suggest that there is a difference between pricing in legitimate risk (that the IRS and firm positions may differ, resulting in some loss) and pricing in risk associated with being caught for engaging in practices that were known ex ante to be highly suspect from a legal standpoint. The latter represents an ‘audit lottery’ type of thinking; that is, there’s a risk we’ll get caught but we’re making so much that it’s worth taking the risk. This type of thinking is contrary to the standards for tax practice prescribed by the AICPA (2009).

  5. 5.

    For example, professionals are afforded the right of self-regulation. Increased external regulation in response to scandals such as the abusive tax shelters marketed by KMPG highlights the potential risks from the loss of professional status.

  6. 6.

    Professional judgment is judgment exercised with due care, objectivity, and integrity within a framework of professional standards by experienced and knowledgeable people (Gibbons and Mason 1988, 5; Mintz 2010, 115).

  7. 7.

    The complete, expanded case with detail appears in Hosmer (2008, 83–96). A brief summary of the case is presented here.

  8. 8.

    Details of Senator Levin’s comments and the BLIPS and SC2 shelters can be found in Hosmer (2008, 89–95).

  9. 9.

    Interpretation No. 1–1, “Reporting and Disclosure Standards” and Interpretation No. 1–2, “Tax Planning” of Statement on Standards for Tax Services No. 1, Tax Return Positions (2011) provide further clarification on the meaning of this standard.

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Authors and Affiliations

  1. Hankamer School of Business, Baylor University, Waco, TX, 76798-8002, USA

    Martin Stuebs & Brett Wilkinson

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  1. Martin Stuebs
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  2. Brett Wilkinson
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Correspondence to Martin Stuebs .

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Editors and Affiliations

  1. Acounting & Law, California Polytechnic State University,, San Luis Obispo, California, USA

    Steven Mintz

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Stuebs, M., Wilkinson, B. (2014). Professionalizing the Tax Accounting Profession: Fulfilling Public-Interest Reporting Responsibilities. In: Mintz, S. (eds) Accounting for the Public Interest. Advances in Business Ethics Research, vol 4. Springer, Dordrecht. https://doi.org/10.1007/978-94-007-7082-9_2

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