Case 4-6 Tax Shelters
You are a tax manager and work for CPA firm that that performs audits, advisory
services, and tax planning for wealthy clients in a large Midwestern city. You just joined
the tax department after five years as a tax auditor for the county government. During the
first six months in tax, you found out that the firm is aggressively promoting tax shelter
As time goes on, it becomes clear that the culture of the tax department is shifting from
client service to maximization of tax revenues. It is the most lucrative type of service for
all big firms and the competition in the industry is fierce in this area of practice. You
become concerned, however, when you discover the firm did not register the tax shelter
products, as required under the law.
audit department and set up a time to meet and discuss your concerns.
What you learn only heightens your concerns. Your friend confided there is a culture in
the tax department where business rationality sometimes displaces professional norms, a
process accelerated by a conformist culture. Your friend also confided that the audit
managers and partners are jealous of their tax peers because the tax managers and
Questions
The KPMG Tax Scandal case is used in Case 8-4 in Chapter 8, “Ethical
Leadership,” to illustrate leadership concerns in the tax department at the firm that
led to the largest tax shelter scandal in history. Instructors may want to cover case
8-6 now or just wait until Chapter 8.
1. Evaluate the ethics of the tax shelter transactions, including your concerns about the
practices.
Seeking out tax clients from among managers of an audit client smacks of
commercialism and not professionalism. Typically, potential tax clients would approach
the firm and ask for advice how to shelter income. While not directly in violation of the
advertising and solicitation rule, unless representations to the client or in the opinion
PCAOB Standards
Investigation of the KPMG tax shelter case by Congress indicated that the PCAOB
should develop new rules for tax shelter products offered by CPA firms restricting
certain accounting firms from providing aggressive tax services to their audit clients,
charging companies a contingent fee for providing tax services, and using
aggressive marketing ethics.
The PCAOB’s concern is that marketing, planning, or opining in favor of tax products
Ethical Obligations and Decision Making in Accounting, 4/e 3
2. Who are the stakeholders in this case, and what are your professional
responsibilities?
The stakeholders include:
• The tax accountant, who is being asked to participate in overseeing tax shelter
transactions.
• The tax partner who made the request and informed you that your road to partnership
requires such participation.
• The firm that relies on tax staff following orders and buying into its culture.
• The manager in the audit department (your friend) who has been asked for advice.
3. What are the options available to you in this matter?
This could be turned into a GVV case by asking students to script a dialogue between the
tax manager and tax partner. It might go something as follows.
Tax Manager: I’ve thought a lot about your request to oversee the tax products and to
sign off on them and have decided I can’t do it.
Tax Partner: Why not?
final say on these products. He knows that objectivity is the cornerstone of providing
advice.
Tax Manager: That’s good to know. You know I just joined the firm. Still, I believe there
is an appearance problem, if not a lack of independence in fact.
Tax Partner: Providing tax shelter products to managers of an audit client are routine. All
firms do it. In fact, tax services are more lucrative to the firm than audit services.
Tax Manager: I don’t think we should make professional decisions based on commercial
interests.
Tax Partner: Where have you been living for the past thirty years? It’s standard practice
in the industry.
4. What would you do and why?
Joe should not give in to the pressure of the tax partner. If he is unable to change the tax
partner’s mind, Joe should consider whether he wants to work for this firm. He just
started and already faces an ethical crisis. What if he becomes involved in a practice that
he believes is unethical? What will the firm expect of him in the future? Is it worth
compromising his values and, potentially, his reputation?