Daily Archives: June 3, 2005

What Killed Arthur Andersen?

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One of the most difficult lessons to learn in becoming a wise counselor is to say “no” to a good client.

In this NY Times op-ed, Times business writer Floyd Norris observes that the demise of Arthur Andersen is attributable to its inability to say “no” to several lucrative clients who were engaging in questionable deals.

He might be right. Certainly the double whammy of damages that a still-in-business Andersen would have probably had to pay in regard to such scandals as WorldCom and Enron would have been huge financial burdens. There is no certainty that the firm could have survived those hits.

But the fact remains that the federal government’s decision to terminate Andersen through criminal prosecution was not only arbitrary and capricious, but bad public policy.

Very few of the 30,000 employees of Andersen were engaged in any wrongdoing, and Andersen was only one of several firms who provided professional advice and services on dubious transactions for WorldCom and Enron.

Nevertheless, Andersen was singled out for criminal prosecution, and the result was economic hardship for thousands of its former employees and less competition for providing audit services for big companies.

As we are now seeing in regard to American International Group Inc. and its auditor, PriceWaterhouseCoopers, the government’s prosecution of Andersen did not deter professionals from helping their clients engage in risky transactions.

That is why such deterrence should be left to the markets, which are much better than the government at efficiently sorting out the type of risk that is good from that which is not.

Sam Wyly, B of A, and the Isle of Man

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samwyly.jpgThis Wall Street Journal ($) article reports that Manhattan District Attorney Robert Morgenthau has launched an investigation in New York of Bank of America, Dallas-based investor Sam Wyly and his brother, and several other institutions in regard to lucrative tax shelters that the Wylys set up in the English tax haven, the Isle of Man. Here is a previous post on the colorful Mr. Wyly, who was also one of President Bush’s biggest campaign contributors in both the 2000 and 2004 election campaigns.
Although legally a possession of the United Kingdom, the Isle of Man operates as an independent country with its own financial laws, the most important of which is that a foreign government cannot enforce in the Isle of Man courts a claim for unpaid taxes against an Isle of Man entity. Thus, tax-shelter promoters often tout the Isle as a convenient tax haven just an hour’s flight from London.
Mr. Morgenthau’s office, and now the Internal Revenue Service and the Securities and Exchange Commission, are investigating a popular stock option that B of A helped the Wylys establish to lock in gains on stock options during the bull market of the 1990’s. The IRS has already determined that the transaction was widely used as a tax shelter, so this new investigation is a part of a larger IRS drive to to identify and punish firms that promoted improper tax shelters.
Under the particular shelter under scrutiny here, wealthy businessmen and U.S. corporations donated options to trusts that they alleged were not under their control. The IRS contends that they retained control of the trusts and that over 40 U.S. corporations and dozens of executives used the arrangement to shelter income and avoid paying more than $700 million in taxes. The Wylys contend that they neither owned nor controlled the trusts, and that they were legitimate vehicles established for the benefit of family members and charities.