| Guarding the Guards |
24 March 2003
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Volcker Cautions Auditors on Tax Advice
Before there was Alan Greenspan, there was Paul Volcker, Chairman of the Fed and true conqueror of inflation. Mr.c Volker is now acting in less public capacities, but he made a public statement to the Big Four (remember when there were Eight?) warning them against providing tax advice to their audit clients. The hemming and hawing were almost enough to drown out the war drums because he was telling them to give up on 30% of their revenues. Yet, there is no other way for them to go and still retain their credibility.
The audit is the single greatest contributor to corporate transparency ever devised. Simply put, every year the company's accountants have to have their work checked over by independent accountants to ensure that things have been done correctly and that the ledger is a true statement of the firm's financial position. Few sales and marketing departments could survive such scrutiny.
One of the largest segments of any book-keeping exercise is the tax section, and in any developed economy, it is complicated. So, most companies make arrangements with tax experts on ways to reduce the funds they need to send to the government. This is not illegal, nor immoral. It is a matter of financial prudence.
The ethical issue arises when the tax advisor and the auditor are the same. Having accepted money to provide tax counsel, an accountant ceases to be impartial. He has a vested interest in approving the tax arrangements as they appear in the ledger. Post-Enron, such a conflict of responsibilities cannot be permitted. Either the accounting firms can find other sources of revenue, simply accept smaller payments, or they can do nothing. The latter course is a highway to Arthur Andersen style disaster.