This runs on diesel fuel and a $2.4 billion tax shelter. Photographer: Luke Sharrett/Bloomberg

Caterpillar's Swiss Tax Dodge Was Its Auditor's Idea

Jonathan Weil joined Bloomberg News as a columnist in 2007, and his columns on finance and accounting won Best in the Business awards from the Society of American Business Editors and Writers in 2009 and 2010.
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It's against the rules for accounting firms to design the computer systems at publicly traded audit clients. But it's OK for accountants to design the same clients' tax strategies.

The idea behind the ban on information-technology consulting was to promote auditor independence -- which is the legal fiction that an accounting firm should stay at arm's length from its audit clients, even though that's impossible because the clients pay the auditor's fees.

Yet Congress and the accounting firms' regulators continue to let audit firms do tax-consulting work for audit clients. Why is that? The short answer is that the accounting profession has very good lobbyists, and tax consulting is a lucrative business. Aside from that, there isn't a good reason.

Today the Senate Permanent Subcommittee on Investigations is holding a hearing that spotlights an offshore tax strategy that Caterpillar Inc. bought more than a decade ago from its auditor, PricewaterhouseCoopers LLP. The shelter, which involved shifting profits to Switzerland from the U.S., saved Caterpillar more than $2.4 billion, according to the panel's chairman, Carl Levin. Pricewaterhouse charged Caterpillar more than $55 million for its services. Nice trade, as they say on Wall Street.

Levin has been on a crusade for more than a decade to expose tax-dodging schemes by big corporations. He has suggested that Caterpillar's strategy in this instance may not comply with the law. The company and its auditor deny this. But their very denials highlight the auditor-independence problem. The company and the auditor are jointly defending the strategy that Pricewaterhouse designed and sold. They're supposed to be independent of each other. But at today's Senate hearing they're in the same boat.

Congress could have chosen to ban accounting firms from providing tax services to publicly traded audit clients when it passed the Sarbanes-Oxley Act in 2002. The Securities and Exchange Commission and the Public Company Accounting Oversight Board also have considered whether tax services taint auditor independence. All of them have decided to let the firms continue with few restrictions. As a result, auditors often wind up auditing their own work, because the tax shelters they sell can have significant effects on their clients' financial statements.

The reason we have public accounting firms is to look out for the investing public. Historically, their audit services have been considered so important that they are mandated by federal securities laws. Yet it should be obvious by now that the firms don't consider the public to be their real client. The clients are the companies that pay their bills. Let's just end this fiction and drop the audit requirement. These firms have become too compromised to deserve our subsidies.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

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