KPMG's Tax Shelters Tax shelter is a legal way to reduce taxable income, which in turn reduces taxes. By utilizing legal tax shelters, it is possible to avoid taxes without evading them illegally and suffering consequences. However, in the case presented by Tanina Rostain. KPMG has used tax shelters as a form of tax evasion rather than tax avoidance. My goal in this paper is to discuss how the concept of Groupthink and Rationalization played a role in the partners decisions, point out when tax avoidance becomes tax evasion, Describe how CPA firms can provide high quality tax consulting for their clients without crossing the line into tax evasion, and Finally analyze why KPMG (as an organization) failed to prevent this scandal from occurring at their firm. First of all, when discussing concepts like "Groupthink" and "Rationalization" I prefer to start with a brief definition. "Groupthink occurs when a group makes faulty decisions because group pressures lead to a deterioration of “mental efficiency, reality testing, and moral judgment”(Irving). While " Rationalization is a defense mechanism that involves explaining an unacceptable behavior or feeling in a rational or logical manner, avoiding the true reasons for the behavior"(Cherry). As we can see from these definitions, the tax partners in KPMG showed popular symptoms' of groupthink which are: * "Illusion of invulnerability –Creates excessive optimism that encourages taking extreme risks.

* Collective rationalization – Members discount warnings and do not reconsider their assumptions.

* Belief in inherent morality – Members believe in the rightness of their cause and therefore ignore the ethical or moral consequences of their decisions."(Irving)
These symptoms were presented throughout the case. For example, Gregg Ritchie a tax professional at the firm concludes "the rewards of a successful marketing{of OPIS} far exceed the financial exposure to penalties that may arise". This poor cost/benefit analysis by Gregg leads us to believe that he (among other professionals in the firm) was under the pressure of groupthink. KPMG tax partners showed similar symptoms. According to the case presented by Tanina " In its efforts to secure its lead in the tax shelter market, KPMG engaged in evasive maneuvers so that its products fly under the IRS's radar screen". This is a typical case of "Belief in inherent morality". As we can see that money was there cause and as long as it keeps flowing the government rights are of no importance in their minds. Furthermore, after viewing the story of Mark Hamersley the whistleblower in the KPMG tax shelter case. We realize how the tax partners were rationalizing their decisions, time after time even though Hamersley kept pointing out that the firms practice with tax shelter products was illegal. We can see this from Richard Bailine's (Tax Partner) communication with Hamersley " Hamersley received an e-mail from Richard Bailine to whom he reported on the audit, informing him that after further conversations with XYZ corporation, the firm concluded that it was able to reach a "should" level of certainty. Later that day, he left Hamersley a voice mail admitting that he and the other partners were looking at the matter through "rose colored glasses." Clearly, "Groupthink" and "Rationalization" played a major role in the partners decisions. As we can see from the previously presented events, all the main symptoms are there. Leading the firm's partners and professionals to take these illegal actions. Tax avoidance is the legal usage of the tax regime to one's own advantage, to reduce the amount of tax that is payable by means that are within the law.(Tax Avoidance) On the other hand Tax evasion is the illegal evasion of taxes by individuals, corporations and trusts. through deliberately misrepresenting the true state of the affairs to the tax authorities to reduce their tax liability and includes dishonest tax reporting.(Tax Evasion) So, as long as you are within the boundaries of the law you are on the safe side. Nevertheless, The line between tax avoidance and tax evasion can sometimes be very fine. There are some things people can do with their money that are perfectly legal under the law, but could be read as attempts to evade taxes. "Moving funds suspiciously and with no clear reason or documentation can attract the attention of tax authorities."(Wisegeek) Moreover, a legal tax avoidance method code turn into a tax evasion when a tax code update is in order. Obviously, these gray areas of the law might be difficult to interpret without the assistance of a tax attorney or tax accountant. In the professional world, mainly in law and accounting firms, Tax avoidance methods are performed on a widely spread level. The Big Four accounting firms (PricewaterhouseCoopers. Deloitte and Touche, KPMG and Ernst & Young) have been major beneficiaries of financial expansion. "They are all multinational and have devised ownership structures to frustrate scrutiny of their own affairs."(Sikka, and Willmott) However, benefiting from loopholes in tax regulation is within tax avoidance and clearly legal. But, when discussing the KPMG tax shelter case. We find that all the Big Four firms did indeed cross the line (even though KPMG was the face of the scandal), and performed tax evasion. Scandals in the business world has recurred several times throughout the years, and I believe that as long as greed and the opportunity for manipulating the system are present, we will continue to see similar cases in the future.

CPA tax practitioners operate in a highly competitive environment. When they are employed in aggressive firms, they face strong incentives to maximize professional revenue by retaining old and recruiting new clients. Clients may demand that practitioners make use of aggressive tax positions to minimize tax liabilities. But there are technical and ethical limits on the tax positions' CPA can take. "The CPAs who overstep these limits can suffer numerous sanctions including penalties, malpractice claims, expulsion from the AICPA, loss of a CPA license, and even imprisonment."(Powell) Recent scandals related to inappropriate tax shelters illustrate the prevalence of these pressures and sanctions. Obviously, the following question arises; How can a CPA firms provide high quality services without crossing the line? In order to answer this question we have to introduce the AICPA professional code of conduct. The AICPA has presented several key standards when discussing these issues:
Professional competence - Undertake only those professional services that the member or the member's firm can reasonably expect to be completed with professional competence.
Due professional care - Exercise due professional care in the performance of professional services.
Planning and supervision - Adequately plan and supervise the performance of professional services.
Furthermore, the following additional general standards for all Consulting Services are promulgated to address the distinctive nature of Consulting Services:
Client Interest - Serve the client interest by seeking to accomplish the objectives established by the understanding with the client while maintaining integrity and objectivity.
Understanding with Client - Establish with the client a written or oral understanding about the responsibilities of the parties and the nature, scope, and limitations of services to be performed, and modify the understanding if circumstances require a significant change during the engagement. Although we all know that the CPA firms are fully aware of these key concepts, yet In real life practice they sometimes seem to be forgotten. Obviously, CPA firms are revenue based services, and generating revenue is their ultimate goal. However, in order to ensure the high service quality for the clients the firm should not introduce any new products that will risk these firm's reputation. In addition, consulting the IRS in regards of any new products or out of the norm practices would guarantee the legal position of the firm. Obviously, "nothing concentrates the mind of a wayward professional -- or one who's contemplating actions that cross an ethical line -- like the threat of jail time." (Gleckman, Borrus, and McNamee)

"The relationship between the organizational culture and business ethics is maintained from the head management towards the rest of the employees. The ethical values are transmitted by superior managers (as they must represent a behavioral model for the rest of the personnel) or by the company’s founders and then they are gradually adopted by all those involved in the organization’s activity."(Militaru, and Zanfir) Organizational culture affects the way employees respond and react when placed in ethical dilemmas. As we can see in the KPMG's tax shelter scandal, greed as well as ethical blindness were the main reason for this crisis. When maximizing revenue became the major concern at the firm, it created a greed culture between its professionals. From the managing partners to the senior associates at the firm, the mentality of maximizing revenue was the firm's culture. This lead several key personal in the firm to rationalize their actions, and since the greed culture was the new norm at the firm, none of them stopped to reevaluate their decisions. Furthermore, the organizational structure of the firm had a huge influence on this scandal. As the tax partners had the authority to present any product that will maximize the firm's revenue without returning to any kind of committee at the firm. This authority gave the tax partners the illusion of superiority, which made them threat and pressure all of those who opposed their actions. We have seen their behavior with Mike Hamersley when he told them what they did not want to hear, and because they had control over his future at the firm they managed to carry on with their plans. Strong implemented internal controls at the firm could have prevented this scandal from occurring. Where let us say a legal committee that would have a final say in the matter could have easily prevented the firm from perusing this unethical plus illegal path. In conclusion, KPMG's hierarchical and highly conformist culture made it difficult for employees to question the tax shelter activity and encouraged them to engage in group think. In addition, This scandal illustrates the importance of the institution of professionalism. As even though that the individuals involved were lawyers and had a complete understanding of their legal actions, they failed to act in an ethical and professional matter. Certainly, knowing the code of conduct in itself is not sufficient without actually practicing it in real life. The KPMG tax shelter scandal is a lesson for all large and small organizations around the world. No matter what area you work in, ethical behavior will surely keep you on the right path, just ask Mike Hamersley. Works Cited

Cherry , Kendra. "Defense Mechanisms." Psychology. About.com. Web. 3 Oct 2013.
Irving , Janis. "What is groupthink." . N.p.. Web. 3 Oct 2013.
Militaru, Cezar, and Adriana Zanfir. "The Influence of Organizational Culture over the Ethical Principles in International Businesses."Human Resource Management Academic Research Society. Human Resource Management Academic Research Society. Web. 3 Oct 2013.
Powell, Richard . "ETHICAL ISSUES IN PROFESSIONAL TAX PRACTICE." Small Business Advancement National Center. Allied Academies International Conference, n.d. Web. 3 Oct 2013.
Rostain, Tanina, Travails in Tax: KPMG and the Tax-Shelter Controversy. LEGAL ETHICS: LAW STORIES, Chapter 3, Deborah L. Rhode & David J. Luban, eds., Foundation Press, 2006; NYLS Legal Studies Research Paper No. 04/05-25.
Sikka, Prem, and Hugh Willmott . "The Tax Avoidance Industry: Accountancy Firms on the Make."University of Essex. Essex Business School, 01 Feb 2013. Web. 3 Oct 2013.
"Statement on Standards for Consulting Services No. 1."AICPA. N.p.. Web. 3 Oct 2013.
"Tax Avoidance." Wikipedia. N.p.. Web. 3 Oct 2013.
"Tax Evasion." Wikipedia. N.p.. Web. 3 Oct 2013.
"What Is the Difference Between Tax Evasion and Tax Avoidance?." Wisegeek. N.p.. Web. 3 Oct 2013.
Gleckman, Howard, Amy Borrus, and Mike McNamee. "Inside the KPMG Mess." Bloomberg Businessweek . Businessweek , 31 Aug 2005. Web. 3 Oct 2013.