Would You Go to the Same Doctor For A Second Opinion?


Multinationals Relying on the Same Advisors for Performing & Auditing Their Tax Planning Strategies

A recent Senate Subcommittee hearing chaired by Senator Carl Levin of Michigan with members of Caterpillar Inc. and its representatives was conducted to discuss certain tax strategies employed by the company.  In questioning the merits of the strategy, the Senator was particularly perplexed by the fact that the same firm “audited and approved the very tax strategy sold by the firm to Caterpillar,” the report said. This dual role created possible conflicts of interest, it added.  In its defense, Caterpillar said that the dual role “violated no law, regulation, or ethical standard.”  [1]

Regardless of whether Caterpillar’s strategy was “good tax planning” or a sham transaction and, thus, considered “tax avoidance” is not the most vexing issue.  Rather, as Senator Levin points out, the fact that the same firm recommended this strategy as their tax advisor and then was ultimately responsible for reviewing and signing off on this arrangement as the company’s auditor, presents numerous questions about whether the spirit of the independence rules were being violated. 

Moreover, the New York Times further points out that “It was not just the firm that was wearing two hats [but the very same] … tax partner who was involved in proposing and carrying out the tax strategy, also advised the audit team, whose duties included judging whether the tax strategies were too aggressive...  If [this individual] can wear both hats in dealing with one company, the Public Company Accounting Oversight Board should consider strengthening its rules on auditor independence.”  [2]

Whenever a tax planning strategy exposes a company to potential risks—either legally, or in perception—which is common when implementing various tax planning strategies, including transfer pricing, proper oversight should be required.  Currently such activities are only implicitly referenced by rules of the various boards and committees governing the accounting industry, including the PCAOB, the AICPA, and more recently Sarbanes-Oxley.  However, until these rules are more explicitly defined, it is ultimately the company’s responsibility to work within the construct of good business practice.  While this is more evident today by the number of companies that have elected, primarily by Board of Director mandates, to separate their advisors for audit and tax services, not enough companies have followed suit.  Perhaps, the most significant product of these congressional hearings is that the accounting board(s) will devise more transparent independence rules and not expose stakeholders to such potential conflicts of interest. 

True Partners Consulting operates exclusively in the tax and business advisory consulting area and does not offer audit services to its clients.  This arrangement allows us to provide our clients with a true partnership opportunity, without concern that our advice will conflict with the rules of any of the aforementioned governing bodies, which could expose public companies to unnecessary risks with respect to their financial reporting.  More specifically, transfer pricing impacts each multinational company’s tax position by shifting income and deductions between and among related parties with varying tax rates.  Such activities can materially impact the tax position of a multinational enterprise, as is the case with Caterpillar for which the amount in question is estimated to be approximately $2.4 billion.  To avoid such conflicts of interest the same advisor should not provide transfer pricing advice (or any other tax advice) and then opine on its client’s transfer pricing system.           

Please feel free reach out to one of the Directors of Business Development listed below that is located near you by  phone or email to better understand how True Partners Consulting can help your company be successful.

[1] Wall Street Journal, “The $2.4 Billion Tax Question for Caterpillar,” James R. Hagerty; Monday, March 31,  2014.   

[2] New York Times, “Switching Names to Save on Taxes,” Floyd Norris; April 3, 2014.

Roger Audino

Director of Business Development Midwest/West

Greg Majors
Director of Business Development South/Southwest

Kristin Mauer
Director of Business Development Northwest

John Shipley
Director of Business Development Northeast

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