Audit Notes: McKenna on Lowenstein; U.S., Island Rogue; Stat of the Day

Francine McKenna over at Forbes takes a swing at Roger Lowenstein’s “Wall Street: Not Guilty” piece (see my take on that one here).

This, about Lehman’s Repo 105 scam, is particularly interesting:

If there was ever a clearer example of fraud and stronger support for claims of fraud regarding a crisis transaction than Repo 105, I don’t know what it is. Not only did Jenner & Block chairman, non-armchair prosecutor, and corporate defense attorney Anton Valukas, the Lehman Bankruptcy Examiner, provide unequivocal evidence for prosecutors of “colorable claims” against Lehman executives and Ernst & Young for disclosure fraud, the New York Attorney General followed up with a lawsuit that uses the word “fraud” to describe the audit firm’s contribution to Lehman’s failure.

It’s unfortunate that Lowenstein follows so many journalists and the SEC in perpetrating a sleight of hand, perhaps willingly, by focusing on the ambiguous legal status of the Repo 105 accounting rather than the willful disclosure fraud and securities law violations that occurred. When a CEO and CFO sign off on financial statements that tell a lie that’s fraud. Violations of Section 302 of the Sarbanes-Oxley Act are criminal acts.

And McKenna, a former auditor, has her own site called re: The Auditors, and she’s particuarly attuned to those issues. This is a very good piece of reporting:

The auditors, for example, are grateful for their continued “good crisis”. I tweeted the CEO of the trade association for Ohio CPAs, Clark Price, saying last weekend:

I’ve rec’d no calls re: Where were auditors? in this crisis” Great. I hate those calls from media.”

Senator Reed held a hearing about auditors and crickets chirped. We’ve been lucky. No one is paying attention.”

McKenna and very few other journalists (Jon Weil is an exception that comes to mind) are paying attention. Where’s everybody else?

Might want to give old Clark Price a holler.

— The Center for Public Integrity’s Michael Hudson reports that although we like to think of the U.S. as a victim of tax haven countries like Switzerland or the Caymans, we’re actually one of the biggest tax havens for other folks, particularly in Latin America, who want to evade taxes in their home countries.

First, this is a great quote:

“We’re the biggest tax haven in the world,” says Robert Goulder, editor-in-chief of U.S.-based Tax Notes International . “People joke about the Cayman Islands. The biggest haven is an island, all right. It’s either Manhattan or Great Britain.”

And Hudson explains how banks have actively sought out this shady business:

Investigations over the past half century have uncovered many examples of Third World dictators and drug cartels laundering money through U.S. banks. A 1999 U.S. Senate investigation reported that Citibank had had “a rogues’ gallery of private bank clients,” including two daughters of former Indonesian President Suharto, a strongman who was alleged to have looted billions of dollars from his country.

But the problem isn’t just drug lords and political grafters, Tax Notes International ’s Goulder says. It’s also plastic surgeons, dentists, architects and other affluent Latin Americans who are usually law-abiding citizens — except when it comes to reporting their incomes and bank balances to tax collectors.

U.S. bankers began a concerted push in the 1970s to lure so-called hot money from a wide range of well-off Latin Americans seeking to avoid taxes in their home countries, according to James S. Henry, a former chief economist for McKinsey & Co. and author of books and papers on offshore money.

By the mid-1980s, Henry says, his research revealed Citibank was taking more money out of developing nations than it was lending to them, and its private banking group had become its most profitable unit.

I’d like to see more on this.

— The Stat of the Day goes to Harold Meyerson in the Washington Post:

America’s 400 wealthiest taxpayers certainly can. In 1955, according to the Campaign for America’s Future, the country’s 400 wealthiest taxpayers had an average income of $13.3 million (in 2008 dollars) and paid 51.2 percent of that in federal income taxes. In 2008, according to IRS calculations, they had an average income of $270.5 million and paid 18 percent of that in federal income taxes. And in 1955, by the way, we could afford to pave roads

Now, median household incomes have risen, too, since 1955—but nowhere near that much. And it goes that said median family’s tax rates haven’t fallen as much. In fact, the rate paid by the third quintile of taxpayers has gone up significantly (see the second-to-last chart here).

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum. Tags: , , , ,