The best way yet to proclaim love for a tax cheat
ERNST & Young LLP received the usual kid-glove treatment given to too-big-to-fail enterprises when it reached a settlement with the U.S. Justice Department over illegal tax shelters it sold more than a decade ago. The government chose not to prosecute the Big Four accounting firm, and Ernst is getting off by writing a relatively small check. The $123 million that Ernst must pay is equivalent to the fees it charged for the tax shelters in question. About 200 Ernst clients used the shelters to try to avoid more than $2 billion in taxes. The firm doesn't even have to pay interest on the ill-gotten proceeds, under the deal revealed last week.
Two Ernst tax specialists were sentenced to prison, while two others had their convictions reversed last year on appeal. Ernst was required to admit that some of its personnel engaged in criminal wrongdoing. All in all, the firm came out fine. The public had forgotten about the investigation years ago.
Yet there was one area where Ernst made out beyond all reason: A veritable love letter at the bottom of the statement of facts that Ernst and the U.S. Attorney's Office for the Southern District of New York agreed to as part of their accord. It said: "The wrongdoing in this case by a small group of professionals at E&Y represented a deviation from the more than 100year history of ethical and professional con- duct by E&Y and its partners." To which one can only respond: What? I asked Julie Bolcer, a spokeswoman for the U.S. attorney, what the factual basis was for the statement. She declined to comment. Amy Call Well, an Ernst spokeswoman, declined to answer the same question. The best way to show the sentence's problems is with a timeline. My space is limited. So rather than cover 100 years, I decided to go as far back as the merger between Arthur Young & Co. and Ernst & Whinney that created Ernst & Young in 1989. The firm has been in trouble over ethical violations and professional mis- conduct on a regular basis ever since. To wit: 1990. Securities and Exchange Commission barred Ernst from accepting new public-company audit work in the New York region for 45 days, after accusing it of professional misconduct during its audits a decade earlier at Norwalk, Connecticutbased U.S. Surgical Corp. 1991
The SEC sued Ernst over auditor-independence violations, after finding that RepublicBank Corp., an audit client, lent millions of dollars to the firm's partners and to tax-shelter, real-estate partnerships in which they invested. The case was settled in 1995. A judge ordered Ernst to comply with the SEC's independence rules.
1992 Ernst paid $400 million to resolve government claims related to the 1980s savings-and-loan crisis. 1999
Ernst paid $335 million to settle investor lawsuits over its certifications of fraudulent financial statements at Cendant Corp. The SEC later suspended two Ernst partners, saying they aided the company's securities-law violations.
2003 Documents in an Arkansas court case showed that Ernst and other Big Four accounting firms had routinely overbilled clients for travel expenses by charging them full fare for airline tickets while pocketing large rebates they had negotiated in volumediscount contracts with carriers.