Facebook Blogging

Edward Hugh has a lively and enjoyable Facebook community where he publishes frequent breaking news economics links and short updates. If you would like to receive these updates on a regular basis and join the debate please invite Edward as a friend by clicking the Facebook link at the top of the right sidebar.

Friday, February 14, 2003

Do the Right Thing

More from our correspondent down at Honesty Pays Inc. Is this the part of the 'New Economy' I never did get?

A dozen tax shelters that Enron used to operate tax-free also fabricated huge profits, the Senate Finance Committee was told Thursday. The disclosure raises disturbing new questions about the reliability of corporate financial reporting. The tax shelters were designed to make it appear that Enron had realized $2 billion of profits almost immediately, while saving $2 billion of federal income taxes over a period of years, a three-volume report by the staff of the Joint Committee on Taxation showed. Enron's tax department "was converted into an Enron business unit complete with annual revenue targets," said Lindy Paull, chief of the joint committee staff. "The tax department, in consultation with outside experts, designed transactions to meet or approximate the technical requirements of tax provisions with the primary purpose of manufacturing financial statement income." "At their core," she said, the tax shelters "were designed to permit Enron to take the position that its long-term tax benefits could be converted to current or short-term financial statement income." The use of tax shelters has become so widespread among the 10,000 largest corporations that their effective tax rate was just 20 percent in 1999, far below the statutory rate of 35 percent and well below the tax rate of the next 31,000 companies, which are too small to attract much interest from tax shelter promoters. Several studies by economists have suggested that tax shelters enable companies that use them to cheat the government out of about $50 billion each year. The idea that tax shelters could be used to create artificial profits seemed to shock the senators, who vowed to shut down such transactions. But when they asked a panel of experts for advice, they got silence or tepid answers, an indication of the complexity of the problem of policing corporate tax returns and financial statements. "The report reads like a conspiracy novel," said Sen. Charles Grassley, R-Iowa, the Finance Committee chairman. The report showed how huge fees were paid to accounting and law firms to set up the deals, often in what Paull said was a collusive manner. She said the tax and accounting opinion letters that Enron paid millions of dollars for, in the hope that it would not pay tax penalties if the Internal Revenue Service demolished its tax shelters, ignored or glossed over accounting and legal issues that made the deals untenable.
Source: Seattlepi.com

No comments: