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Accounting and the Public Interest Volume 10, 2010 Pages 1335

American Accounting Association DOI: 10.2308/api.2010.10.1.13

Ethics and the Tax Profession: Restoring the Public Interest Focus
Martin Stuebs and Brett Wilkinson ABSTRACT: Tax practice is an integral component of the public accounting profession. Although accountancy as a profession embraces a strong public interest notion, there is an inevitable tension in tax practice between serving the client and maintaining the integrity of the tax system. Resolving this tension necessitates an ethics-infused judgment process. Ethical failures over the past decade have weakened the tax profession and called into question the extent to which practitioners in fact operate in a manner consistent with the public interest. In this paper, we explore the fundamental causes of the ethical problems that have plagued the tax profession and provide a roadmap for reform of the tax profession. Using Cresseys 1953 fraud triangle as a framework, we rst examine the normative ideal for the tax profession. We then examine the recent tax shelter abuses perpetrated by the major public accounting rms and nd results consistent with our expectations under the fraud triangle analysis. In essence, ethical breakdowns resulted from the loss of a public interest emphasis, which in turn led to the explicit pursuit of commercial gain at the expense of the public interest. That the frauds were perpetrated within the context of a profession founded on a public interest notion is particularly concerning. In response to the problems observed, we identify key cultural reforms needed within the accounting academy, the accounting profession, and the tax system in order to restore trust and the public interest character of the tax profession to center stage and so guard against further adverse outcomes.

INTRODUCTION
In recent years there has been ample evidence of an ethical crisis within the tax profession. The development of complex tax shelters and the aggressive marketing of such shelters throughout the 1990s are behaviors symptomatic of the deeper problems plaguing the profession. Fundamentally, the problem arises from the tension inherent in tax practice between serving the client and maintaining the public interest focus that is an integral and dening feature of a profession. Although much attention has been devoted to understanding and resolving the crises that have aficted the accounting profession on the audit side, much less emphasis has been placed on resolving the tax-related issues. As Sikka and Hampton 2005, 340 note, the aggressive tax avoidance behavior of the major public accounting rms raises major questions about the assumed social responsibility and ethics of accountancy rms but such issues attract little attention in the bourgeoning corporate social responsibility and accounting literature. Unless the underlying causes of the ethical problems in the tax area are investigated and appropriate solutions explored, the probability that such mistakes will be repeated is high. Understanding the unique issues facing the tax profession is therefore a high priority.

Martin Stuebs is an Assistant Professor and Brett Wilkinson is an Associate Professor, both at Baylor University.

Published Online: 4 November 2010

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In this paper we explore both the genesis of the ethical problems observed in the tax profession and propose changes to safeguard the future integrity of the profession. We achieve this by analyzing the tax profession within the framework of the fraud triangle Cressey 1953. This framework suggests that violations of the public trust occur when three elements are present: the opportunity to engage in unethical behavior, incentives to engage in such behavior, and rationalization of the behavior. Using this framework, we rst examine what the tax profession should look like. We pay particular attention to the claims of tax practice to professional status and the behavioral attributes that would validate such claims. One such attribute concerns the claim of a profession to operate with a public interest focus. Sociologists have long held that a profession is distinguished, at least in part, by a public interest focus that curbs purely self-interested behavior patterns Toren 1975. A professional, in essence, is motivated by something beyond commercial gain. In the tax context, this is manifested in the requirement of the tax professional to balance the needs of the client with the duty to uphold the integrity of the tax system within which the professional operates. We then examine the way in which the profession has deviated from this normative ideal in recent years. Specically, using the fraud triangle framework, we examine developments in the tax shelter industry and the subsequent abuses in which each of the Big 4 public accounting rms were implicated. We present evidence from the literature that the problems observed in the tax profession arose as a result of the profession abandoning its public interest focus in favor of unbridled prot seeking. This is consistent with the commercial imperatives that drove American accountancy in the 1990s Fogarty et al. 2006. Finally, we propose several avenues for change, by which the public interest focus of the profession might be restored. These include reforms at the academic accounting level in both teaching and research, reforms within the profession itself, and reforms to the administration of the tax system. Viewing the proposed reforms within the fraud triangle framework helps demonstrate the interdependent nature of academia, the profession, and the tax system in providing solutions to the ethical failures observed. The remainder of the paper is structured as follows. In the next section, we provide an overview of the fraud triangle framework. Following that, we employ the framework to build a normative ideal for the tax profession in the third section. The fourth section provides a detailed analysis of the tax shelter industry, highlighting the way in which the profession has deviated from the normative ideal. In the fth section, we provide recommendations for change, followed by our concluding comments.

THE FRAUD TRIANGLE FRAMEWORK


The fraud triangle Cressey 1953 provides a helpful and well-established framework for analyzing the tax profession. A fraud, or trust violation in Cresseys 1953 terminology, generally involves three elements: opportunity, incentives, and rationalization. These are depicted in Figure 1 below. Two of the fraud triangle elements, opportunity and incentives, derive primarily but not exclusively from the external environment. The third element, rationalization, is internal to the individual. Opportunity In the tax reporting environment, information asymmetries, uncertainty, or ambiguity combined with absent or lax monitoring and enforcement mechanisms can create opportunities for tax reporting fraud. The tax law is replete with gray areas, thus creating opportunities to exploit so-called loopholes in order to lower taxes, but which simultaneously undermine the integrity of the
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FIGURE 1 Fraud Triangle ModelFactors Contributing to Tax Reporting Frauds


Incentives Economic Social (including legal) Moral

Opportunity Situational Characteristics: o Information asymmetries, ambiguities, uncertainties. o Regulation and monitoring characteristics

Rationalization Categories of Rationalization o Regulatory arbitrage o Strategic non-compliance

tax system. Opportunities for trust violations also exist where detection risk is low. The very nature of our tax system is such that it would be prohibitively costly to monitor all tax reporting activity. The IRS is not sufciently resourced to comprehensively monitor tax reporting Smith 2004. Thus, the tax system is administered using a combination of self-reporting and sample auditing. As a result, the IRS is often at an informational disadvantage in the tax reporting environment. Incentives Incentives serve to inuence judgment Watts and Zimmerman 1986 and represent the return to fraudulent tax reporting. Incentives take three primary forms: economic, social, and moral. Economic incentives involve individuals behaving in ways that maximize their own self-interests. Economic incentives generally involve the prospect of nancial gain or loss. For example, increasing or maintaining client fees and retaining clients provide strong economic incentives for the tax practitioner. Counterbalancing this incentive are the associated penalties and nes for violating the law or not meeting practitioner standards of responsibility. Social incentives involve individuals aversion to being seen by others as engaging in wrongful behavior. These can be either formal or informal; for example, corporate culture creates both formal and informal social incentives to behave in particular ways. Avoidance of legal penalties serves not only as an economic incentive, but also carries with it a social incentive element. This is because the desire to avoid adverse publicity might limit persons from engaging in fraudulent behavior. In addition to pressures to comply, social incentives can also involve pressures to impress by meeting or exceeding perceived social norms and expectations. Social incentives are similar to subjective norms or an individuals perception of social pressures in the Theory of Planned Behavior Ajzen 1985. Although economic and social incentives derive primarily from the environmental situation
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external to the individual, moral incentives are internal and involve individuals aversion to doing something they consider to be wrong. Moral incentives focus on duties, responsibilities, and obligations. For example, the tax accountant has dual responsibilities to advocate for the client and to serve the public by maintaining the integrity of the tax system. Incentive effects are both pervasive and interrelated Nelson 2003 and often conict with one another. For example, economic incentives can be problematic motivators when dealing with the nature of public goods like the accounting professions asset, public trust. Fox 2008, 1099 provides a helpful summary of this concern, noting: A public good is underproduced because the person creating it incurs all the costs but receives only a small portion of the benets, which are spread over some larger population. Each gatekeeping rm bears the full cost through lost monetary income of its contribution to the public purposes of the profession. It receives, however, only a small portion of the benets, since the identication-enhancing effect of the increase in the social practice arising from the particular rms contribution is spread over all the agents working in the entire gatekeeper industry emphasis added. As a result, economic considerations of costs and benets frequently lead to an underproduction of public goods, and thus economic incentives can be seen as conicting with social and moral incentives. The empirical behavioral tax research literature provides evidence of this effect. For example, Cloyd and Spilker 1999 nd evidence that practitioners are biased in their information search toward evidence that supports the clients position. This reects the economic incentive associated with pleasing the client. Kadous et al. 2008, 135 nd the same conrmation bias in low risk situations, but nd that in high practice risk situations practitioners pursued a more balanced search, resulting in more objective judgments about the authoritative support for the client-preferred position. Changes in the 1990s intensied the conict between economic and moral incentives. The economic boom of the 1990s increased incentives for companies and individuals to decrease their effective tax rates and thus increase economic gain. At the same time, Congress was reducing the IRSs budget, leading to less effective monitoring and enforcement. These changes placed increased pressure on individual tax professionals moral incentives to maintain professional trust by meeting duties and responsibilities to both clients and the public.1 Rationalization The third essential component of the triangle, rationalization, involves the individuals internal response to the external opportunities. The response reconciles an individuals internal moral incentives with economic and social incentives present in the environment and created by the situation. Rationalization arises when tax preparers justify aggressive reporting behaviors. Bratton 2003 identies two primary ways in which a tax preparers applied reporting objective may deviate from a tax laws originally communicated objective: regulatory arbitrage, and strategic noncompliance. In effect, these rationalization approaches involve the tax preparer mentally eliminating the difference between what should be done and what is done. Regulatory arbitrage involves the practice of structuring an inappropriate transaction so it stays within the bounds set by a rule Bratton 2003, 1044. In other words, regulatory arbitrage modies the characteristics of
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Interestingly, in a more recent study, Kadous et al. 2008 nd evidence of increased conservatism among practitioners, which they note contrasts with the results of earlier research see Cloyd and Spilker 1999. They suggest that We expect that this conservatism is a response to the new regulatory environment that discourages aggressive recommendations Kadous et al. 2008, 153. Volume 10, 2010

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the actual transaction to meet the tax laws technical and literal requirements. The preparer can then rationalize the action because it is technically in compliance with the law; that is, the public interest condition has been satised. In contrast to regulatory arbitrage, strategic noncompliance modies the interpretation and application of tax law to t the transaction. Strategic noncompliance involves an action under an interpretation of the law in conict with the stated interpretation of the regulator Bratton 2003, 1044. It takes advantage of opportunities to exercise judgment within the law. Effectively, the rationalization occurs when the preparer imbues meaning to the law that is different from the original intent of the regulators. Although the original intent of the law may not always be clear, strategic noncompliance implies an aggressive use of judgment such that the practitioner distorts the underlying spirit of the law in order to achieve a positive tax result for the client. It is intentional and not a mere unanticipated deviation from the original intent of the regulators. Ultimately, then, when they coincide, opportunity, incentives, and rationalization can cause tax practice to deviate from its intended ideal. Conversely, if each of the elements is not present, according to Cressey 1953, fraud will not occur. The challenge, then, is to nd ways to control the impact of each of the three elements, thus curtailing the occurrence of tax fraud. We next examine the manner in which, in an ideal world, the public interest dimension of the profession operates on each of the three elements to provide an environment that is not conducive to fraud.

THE NORMATIVE IDEAL


In this section, we establish a normative denition of the tax profession. This normative ideal provides a benchmark against which we can evaluate the current state of the profession and, to the extent that the current practice diverges from this ideal, propose a roadmap for reform. As noted above, the very nature of our tax system creates incentives and leaves open opportunities for trust violations. As a result, such a system relies on a practitioners internal good judgment to limit rationalization and prevent fraud. A practitioners internal understanding of and commitment to what it means to be a professional limits internal rationalization even in environments where external opportunities and incentives exist, like our tax system. In this section, we posit that the central tenet of avoiding trust violations in tax practice is embedded in the professional requirement to serve the public interest in preference to purely private interest. This is operationalized by developing the competence and character of a professional. Professional competence and character limit rationalization and form the cornerstone of the normative tax system model in Figure 2. They also play a key role in shaping moral incentives, which serve to counter-balance some of the economic and social incentives toward fraud. Although these qualities are within the professional, the profession can take external steps to develop, reinforce, support, and protect the professionals internal competence and character. Specically, the profession can take steps to guide practitioner judgment, constrain opportunities, and manage incentives. To the extent that tax practitioners embrace and develop the self-regulatory professional controls of competence and character, both at the individual level and collectively at the professional level, there is less need for additional external systemic regulation. We turn our attention, then, to the meaning of a profession and apply it to normative tax practice. Internal Self-Controls: Professional Competence and Character Although the concept of profession has been widely debated in the literature, Toren 1975, 325 identies two key characteristics of professions that appear to be accepted within the literature: a body of theoretical and technical knowledge and a service orientation. These foundational
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FIGURE 2 Normative: The Role of Profession in Countering Abusive Trust Violation Behaviors in Tax Accounting
Incentives: External Economic: Economic reward for providing trustworthy information to clients and to the system. Social: Standards sanctions provide disincentives for fraud because of the loss of status Internal Moral: Professional duties to both clients and the tax system to provide trustworthy information

Opportunity: External: Monitoring and enforcement of standards curb opportunities:

Rationalization: Internal: Professional competence and service-oriented character (grounded in an understanding of the public interest role of the profession). External: Standards provided by the profession that guide judgment

professional responsibilities of technical competence and service-oriented character build trust Covey 1989; Covey et al. 1994. Responsibly creating and maintaining this public trust yields professional rights and benets including professional autonomy, certain monopoly power, and the right to control the entry of new members, among others Toren 1975.2 The rst of Torens 1975 characteristics, a body of specialized knowledge and technical competence, sits neatly with the tax profession. Tax practitioners operate within a highly complex regulatory environment in which knowledge of the tax law is critical. One of the primary services provided by the tax practitioner is competently negotiating the myriad tax rules, from both a planning and compliance perspective. The second of Torens 1975 characteristics, the service-oriented character, warrants additional exploration. In effect, this service orientation amounts to the members of a profession adopting a public interest, rather than merely a private business perspective. Numerous authors in the accounting domain have afrmed this public interest role. Public accountants have a responsibility to third parties including the general public Almer et al. 2005, 5; emphasis added to provide trustworthy, useful information. Puxty et al. 1994, 7778 summarize the accounting professionals primary commitment to the public interest and ethical actions in the following way: A recurring feature of accountancys claim to professionalism is a commitment to ethical
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This is consistent with the importance of rights and responsibilities in Dillards 2008 ethic of accountability model. Volume 10, 2010

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actions. The claim involves an assurance that the accountancy bodies and their members will not pursue their material self-interests as sellers of accounting labor in ways that conict with their duties to the public interest. Cohen and Holder-Webb 2006, 26 note that serving the public interest is arguably the raison detre for the accounting profession. Dillard 2008 notes that the very existence of the public accounting profession depends on what he terms an ethic of accountability. This ethic of accountability, he suggests, refers to the dual responsibility of managers to account to society for the use of resources and the responsibility of society to hold managers accountable for their actions. Much of the literature concerning the public accounting professions public interest responsibilities focuses on the audit role. There seems to be broad acceptance that, beyond the duty to the client, the auditor owes a primary duty to provide trustworthy information to the public. In contrast to auditors, tax accountants public interest responsibilities may be less apparent because they not only have public interest obligations, but also serve as client advocates Brody and Masselli 1996; Shaub and Fisher 2008. The Statements on Standards for Tax Service SSTS identify the existence and importance of tax accountants public interest responsibilities by stating that In addition to a duty to the taxpayer, the professional has a duty to the tax system The standards recognize the professionals responsibilities to both taxpayers and to the tax system SSTS No. 1. Recent IRS commissioners have made comments supporting the tax accountants dual responsibilities to clients and the public. Then-Commissioner of the IRS, Shapiro 1986, 136, 139 pointed out: The public responsibility is of pervasive importance In the normal practitioner-client relationship, both duties are recognized and carried out. However, there are situations in which this is difcult. In those situations, the practitioner is required to decide which obligation prevails and, in so doing, may correctly conclude that the obligation to the tax system is paramount The IRS relies on tax practitioners to assist it in administering the tax laws by being fair and honest in their dealings with the Service and by fostering condence by their clients in the integrity of the tax system and in complying with it. emphasis added Then-Commissioner Mark Everson expressed similar sentiments in his statement to the Senate Finance Committee in 2003 by commenting that professional standards have eroded in some corners of the practitioner community. Attorneys and accountants should be the pillars of our system of taxation, not the architects of its circumvention Everson 2003 emphasis added. In an interview with the Journal of Accountancy, Commissioner Everson went so far as to point out that both clients and the IRS rely on the trustworthy information of tax practitioners in administering the system. He noted that: We cant administer the tax system alone. We rely on the work of accountants and attorneys to make sure people get good advice and take the proper tax positions Individual and business taxpayers rely on their CPAs to give them answers that are correct under the law without causing them to pay more than they have to. Its a delicate balance, and one that requires integrity. Pickard 2005, 31 The accounting professionals service orientation, or character dimension, holds also in the tax context. To expand upon Dillards 2008 ethic of accountability, we might suggest that the taxpayer owes a responsibility to society to pay his or her fair share of tax, while society has a responsibility to ensure that all taxpayers pay their fair share. The tax profession, as an integral part of the tax system that facilitates this tax ethic of accountability, must balance serving the client
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with the need to maintain the system. Although there is a tension between serving the client and meeting the public interest obligations associated with being a professional, a professional who identies strongly with the professed public purposes of her profession is more likely to resist trust violations because, whatever the rewards of doing so, it will reduce her self-respect Fox 2008, 1098. Thus, the notion of profession, and the central role of serving the public interest embodied in that notion, serves to counter rationalization of inappropriate behavior the lower right-hand point of the triangle in Figure 2 and to mobilize moral incentives in the presence of economic incentives the apex of the triangle in Figure 2. Supportive Professional Self-Regulatory Controls As noted above, a true understanding of the public interest role of the tax professional serves to limit trust violations by reducing rationalization and strengthening the moral incentives that the tax professional faces. To be completely effective, however, these need to be further supported by profession-wide self-regulatory controls. Self-regulatory controls at the profession level serve to support and develop the individual tax practitioners self-regulatory professional character and competence. Expressed in another way, the profession, in order to protect its asset, the publics trust, may act to limit the behavior of its members that might lead to trust violations. This may occur in one of two ways, both of which are incorporated into Figure 2. First, the profession may inuence judgment by providing guidance to help members resolve conicts of interest between the client and the public interest. This serves to limit the professionals rationalization of abusive behavior because the professional has an external support structure for dealing with the conict. This may be particularly helpful for members who face pressure from clients because it serves as a mechanism for explicitly incorporating the public interest into the decision-making process. Second, the profession may curb opportunity and incentives by imposing specic standards and accompanying sanctions on its members. The setting of standards removes some of the opportunity to commit tax fraud because the professional must now confront an additional obstacle before engaging in the trust violation. As noted earlier, one of the problems arising from the complexity of our tax law is that there are ample opportunities to use ambiguity in the law to engage in unethical behavior i.e., the complexity of the law presents opportunity. The use of sanctions serves to counter the economic incentive to engage in fraud by introducing an explicit cost both in monetary terms but also in loss of status for such behavior. In effect, an appropriate use of sanctions internalizes some of the costs noted earlier, namely that the individual professional who engages in fraud shifts costs onto the profession as a whole Fox 2008.

DEVIATION FROM THE NORMATIVE IDEAL


Although the profession began with a strong grounding in the public interest ideal, developments in recent decades would imply that something has gone awry in the balance between public and personal interest. In this section, we examine the tax shelter industry as an example that demonstrates a major failure of professional ethics in the tax profession. The tax shelter evidence contrasts with the expressed normative claims of ethical conduct and social responsibility made by the accounting profession. We use this example for three reasons. First, it demonstrates that the ethical failures in the profession are widespread and occur in some of the largest and most inuential tax rms in the world. Second, it demonstrates that failures occur even in the context of professional and legal constraints, and within rms with explicitly stated ethical codes of behavior. Third, tax shelters represent a continuing and signicant problem for the tax
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profession. In fact, abusive3 tax shelters have been described as the most serious compliance issue threatening the American tax system Bergin 2000 and, despite changes addressing the shelter industry, it likely remains a major compliance issue. Further, little of the initial response to the tax shelter crisis dealt with self-regulatory reforms to develop tax practitioners competence and character. Instead, initial responses proposed additional systemic reforms and external controls which can continue to perpetuate an illusion of control Rosanas and Velilla 2005, 87; Dermer and Lucas 1986, 471 rather than addressing the root causes of the problem. In this paper, we suggest that real change will occur only if practitioners return to a foundational understanding of the public interest role of the tax profession. The Big 4 public accounting rms played an extensive and dominant role in the tax shelter industry Wang 2003, and there is ample evidence that each rm was complicit in the abuses. For example, according to the Permanent Subcommittee on Investigations of the Committee on Homeland Security and Governmental Affairs, U.S. Senate 2005, which investigated the role of professional rms in the tax shelter industry, Ernst & Young and PricewaterhouseCoopers sold generic tax products to numerous clients, in spite of evidence that some were potentially abusive or illegal tax shelters. Wang 2003, 1261 reports that Deloitte & Touche promised to zero out a companys taxes for a contingency fee of 30 percent of the tax savings, and in Smith 2004, a government ofcial describes KPMG as one of the worst perpetrators. Although all of the Big 4 rms developed aggressive tax shelters, much of our discussion will focus on KPMG and the abuses that were discussed by the Permanent Subcommittee on Investigations of the Committee on Homeland Security and Governmental Affairs, U.S. Senate 2005; hereafter, Permanent Subcommittee. Similar to the other Big 4 rms, KPMGs tax shelter activities illustrate the manner in which external opportunities and incentives in the tax reporting environment inuenced practitioner judgment and led to internal rationalization. Ultimately, KPMG was quick to trade on its reputation to develop a thriving, highly protable tax shelter practice Rostain 2006, demonstrating the way in which commercial interests came to dominate the public interest. Tax shelters provided the tax professional with all the elements opportunity, incentive, and rationalization necessary for a trust violation. Ambiguous legal guidance and limited monitoring and enforcement provided opportunities for accounting rms to develop and sell aggressive tax shelters. The ability of accounting rms to obtain sizeable prots from tax shelter sales by charging contingent fees created enormous economic incentives. Weak penalties and the perceived low risk of detection failed to create a signicant deterrent cost. Rationalization occurred as competitive pressures drew attention away from the professional duty owed to the public, in favor of short-run commercial gain. The Big 4 rationalized their aggressive pursuit of tax shelter prots, through both regulatory arbitrage and technical compliance and through strategic noncompliance. Although protable, the primary consequence of the tax shelter abuses was a loss of client, government, employee, and public trust. In this section, we document the relevant characteristics of the tax shelter environment that resulted in trust violations. These are summarized in a fraud triangle framework in Figure 3:

There is an important distinction between legitimate tax shelters and abusive tax shelters. For example, Murphy and Higgins 2008 note that some shelters are intentionally provided by Congress to encourage investment in certain activities and that even tax-exempt municipal bonds would constitute a shelter in the broadest sense of the term. As we discuss later, and as dened by the Permanent Subcommittee 2005 report, abusive shelters are intended to subvert the law. Volume 10, 2010

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FIGURE 3 Deviation from the Normative Ideal: Tax Shelter Trust Violations
Incentives: 1. Economic: a. Weak penalties b. Contingent and Joint Fees c. Strong market and competitive pressures 2. Social: a. Corporate culture pressures 3. Moral: a. Received secondary consideration

Results: 1. Shift from a profession to a career. a. Shift focus from service interest to self interest b. Aggressive self-interested marketing of tax products 2. Compliance with legal form not substance 3. Avoiding detection 4. Failure to consider professional practice and ethical dimensions. 5. Unintended wealth redistribution 6. Loss of trust

Opportunity: 1. Tax Shelter Legal Uncertainty 2. Limited monitoring and enforcement

Rationalization: 1. Awareness of legal flaws. 2. Legal rationalization 3. Economic rationalization a. Cost-benefit analysis b. Accepted practice in industry

External Elements: Opportunity and Incentives Opportunity We begin our discussion of the fraud triangle Figure 3 with a discussion of the opportunity point. The legal uncertainty surrounding the tax shelters created great opportunity to exploit this uncertainty. A tax shelter is, by denition, a device used to reduce or eliminate the tax liability of the tax shelter user Permanent Subcommittee 2005, 1. Not all tax shelters are illegal and, in fact, legality depends heavily on the taxpayers purpose and intent in using a tax shelter Minority Staff of the Permanent Subcommittee on Investigations 2003, 2 hereafter, Minority Staff 2003. The primary purpose behind unwarranted abusive tax shelters is the avoidance or evasion of taxes in a manner not intended by the law Permanent Subcommittee 2005. In practice, the distinction between abusive and legal shelters is not always clear. In fact, the legality of KPMGs tax shelters was a subject of debate within the government itself Wall Street Journal 2006, A26. The ambiguity surrounding the legality of tax shelters made it easier for the Big 4 to nd lawyers willing to issue more likely than not opinion letters supporting aggressive tax shelters Wang 2003, 1259. Further fueling the opportunity for the use of tax shelters was the lack of monitoring and enforcement of the accounting industry Wang 2003. Ultimately the IRS lacked the resources to monitor the tax shelter operations Smith 2004, and this limited monitoring and enforcement, along with ambiguous tax shelter laws, enhanced the opportunity for tax shelter fraud. Economic Incentives In the tax shelter fraud, economic incentives dominated incentives, the second point of the triangle Figure 3. As noted earlier, often the return to abusive tax behavior can be signicant and
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can induce self-interested action. In the tax shelter cases, the immediate economic gains were substantial and the potential penalties involved were largely inconsequential when compared with the tax shelter earnings. For example, Smith 2004 reports a former employee of KPMG as suggesting that the penalties associated with not registering paled in comparison to the revenues that would be generated by these tax shelters that had to be registered. And if they were registered, KPMG decided they couldnt sell them. So they made a business decision not to register them. Contingent fees exacerbated the impact of economic incentives. The ability to charge contingent fees raised the return potential, and such fees were a key economic incentive in the aggressive sale of tax shelters Wang 2003. The use of contingent fees is professionally questionable because they can divert attention from maintaining the tax systems integrity in favor of pursuit of high fees and breed disrespect for the tax system Wang 2003, 1268. Such contingent fees, however, became more attractive in an environment of competitive market forces. Market pressures diverted accounting rms away from steadfastly administering their entrusted client advocate and legal administrate responsibilities in favor of commercial gain Permanent Subcommittee 2005, 88. For example, KPMGs tax shelter approval process was driven by market considerations, such as revenue potential and speed to market. Ethical and professional considerations received only secondary consideration Minority Staff 2003, 7. Strong economic incentives, coupled with weak disincentives and strong market forces, played a key role in the development of the tax shelter industry. Social Incentives In addition to the economic incentives, social pressures reinforced the drive toward the use of tax shelters. As noted earlier, social pressures can be exerted via factors such as rm culture. In the KPMG approval process, superiors placed intense pressure on subordinates to comply with and impress superiors by signing-off on the merits of a proposed product even with serious questions about its legal compliance Permanent Subcommittee 2005, 22; Minority Staff 2003, 7. This reects a strong social pressure to serve the private interest of the rm over the public interest. Moral Incentives In the normative case depicted earlier, moral incentives should be fueled by a deep internal understanding of and commitment to the public interest role of the profession. However, in the tax shelter case, the combined economic and social incentives to engage in abusive behavior overwhelmed ethical and moral incentives associated with the professions public interest role see the apex of the fraud triangle in Figure 3. In fact, it is ironic that the rms that sold tax shelters frequently traded upon their strong reputations for integrity. KPMGs case serves as a helpful example. An internal rm email that has subsequently been made public stated: Our reputation will be used to market the transaction The business decisions to me are primarily two: 1 Have we drafted the opinion with the appropriate limiting bells and whistles and 2 Are we being paid enough to offset the risks of potential litigation resulting from the transaction? Permanent Subcommittee 2005, 20. Thus, the public interest reputation of the profession was not only disregarded but used to pursue commercial gain. Internal Element: Rationalization The accounting rms were aware of the highly questionable and precarious legality of their tax shelters Permanent Subcommittee 2005. Although they were aware of the dubious legality, the rms often justied aggressive tax shelters on the basis that the structures adhered to the
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technical letter of the law. For example, KPMGs tax shelters complied with the literal form of the tax law but not the intended substance Permanent Subcommittee 2005, 1. As noted above, more often than not the behavior was driven by economic rather than ethical concerns. For example, KPMG increased fees to reect the increased risk from dubious tax products Permanent Subcommittee 2005. The economic benets provided the primary rationale for creating and marketing the tax shelters. A now-public KPMG email discussing the registration and sale of OPIS, a tax shelter product, notes the following economic reasons: KPMG should make the business/strategic decision not to register the OPIS product as a tax shelter First, the nancial exposure to the rm is minimal Third, the tax community at large continues to avoid registration of all products Fourth, there has been and, apparently, continues to be a lack of enthusiasm on the part of the Service to enforce section 6111 I believe the rewards of a successful marketing of the OPIS product far exceed the nancial exposure to penalties that may arise. The memorandum advises KPMG to knowingly violate the law requiring tax shelter registration, because the IRS is not vigorously enforcing the registration requirement, the penalties for noncompliance are much less than the potential prots from the tax product, and industry norms are not to register any tax products at all. Permanent Subcommittee 2005, 5758 The analysis outlined in the email simply considers the economic factors of reward, risk, and market considerations. KPMG felt that not selling the tax shelters would put KPMG at a severe competitive disadvantage Rostain 2006. Thus, economic and legal rationalizations were used to support the sale of tax shelters and apparently little consideration was given to ethical professional principles. The governments investigation of KPMGs tax shelter decisions notes this glaring deciency: One might have expected a thoughtful discussion or analysis of the rms duciary duties, its ethical and professional obligations, or what should be done to protect the rms good name. Unfortunately, evidence of those thoughtful discussions was virtually nonexistent and considerations of professionalism seem to have had little, if any, effect. Minority Staff 2003, 16 Maintaining the integrity of the tax system by reporting trustworthy information deserves and requires the accounting professions primary attention. As noted earlier, it is indeed the foundation on which a profession is established. However, in the case of the tax shelter industry, the public interest role was essentially disregarded in favor of an emphasis on the private interests of the rm. This private interest focus permitted rationalization of the tax shelter activity using both regulatory arbitrage structuring a transaction to meet the technical requirements, but not the spirit, of the law and strategic noncompliance interpreting ambiguous law in a way that ts and justies the transaction. Results Although aggressive tax shelters initially resulted in economic benets, signicant costs accrued to the profession and society as a whole. In this section, we outline several tax shelter consequences that have the potential to undermine the very core of the tax profession, the commitment to the public interest. In the following section, we address changes that the profession might make in order to recapture its public interest focus and restore the reputation of the profession.
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Shift from a Profession to a Career Aggressive tax shelters provided an example of a shift from professionalism to commercialism Permanent Subcommittee 2005. Firms emphasized customer-driven commercialism and client service rather than public-spirited responsibilities to the public or the state Hanlon 1994. The pursuit of higher nancial rewards eclipsed traditional values Sikka and Hampton 2005. As Mike Hamersley, an ex-KPMG employee, states, KPMGs objective was to change the mindframe of a tax professional from nding problems with transactions and trying to address them objectively to going out and proactively selling tax shelters and trying to close sales Smith 2004. This shift from professionalism to commercialism signals a shift from service interest to self-interest, and is consistent with the commercialization trend within the broader public accounting profession see, for example, Fogarty et al. 2006. As Toren 1975, 326 notes, one driver of deprofessionalization is that the service ideal is liable to subversion by self-interest or narrow vested group interests. Instead of directing primary attention to client advocate and public interest responsibilities, KPMGs attention was rst focused on revenue generation. Rather than developing tax products to serve clients and the public, tax products were expressly developed and marketed to generate revenue Permanent Subcommittee 2005, 9, 12. KPMGs tax shelter approval process reveals the primary revenue generation purpose for tax shelters. Initial screening for revenue and technical potential was the rst stage in the tax shelter approval process. Instead of receiving primary attention, screening for ethical considerations was the third and nal stage in the tax shelter approval process. In the second stage of the review process, the tax strategy received a thorough review to determine whether the product met the technical requirements of existing tax law Permanent Subcommittee 2005, 14, 15. In addition to secondary consideration in the approval process, KPMG allocated insufcient resources to the Department of Professional Practice DPP, the group performing the ethical compliance reviews of new tax products Permanent Subcommittee 2005, 15. Finally, KPMGs response to DPP reviews reveals a shift to commercialism. Instead of respecting DPP reviews and removing suspect tax products, KPMG would often try to inuence and alter DPP reviews Permanent Subcommittee 2005. KPMGs aggressive marketing tactics also signal a move away from service-interested professionalism to self-interested commercialism. Tax shelter services were no longer client-specic. Instead, generic tax shelters were developed and then methodically and aggressively sold Wang 2003, 1251. The goal of KPMGs tax sales initiatives was to create an aggressive sales culture to maximize revenue through aggressive sales Permanent Subcommittee 2005, 42. Internal KPMG communications encouraged this aggressive culture and promoted aggressive marketing. For example, one such communication read: We are dealing with ruthless executionhand to hand combatblocking and tackling. Whatever the mixed metaphor, lets just do it Permanent Subcommittee 2005, 36. This aggressive marketing demonstrates that KPMG was no longer a disinterested professional. It was now a self-interested entity. In pursuit of self-interest, KPMG turned tax professionals into tax product salespersons, pressured tax professionals to meet revenue targets, and used questionable marketing tactics Permanent Subcommittee 2005, 33. Often, KPMGs marketing was primarily done to increase revenuenot to help the client as a client advocate. For example, KPMG marketed tax shelters to persons with little interest in tax shelters and who did not understand what they were being sold Permanent Subcommittee 2005, 33. The self-interested marketing tactics KPMG applied to these clients bordered on the deceptive. For example, KPMGs development process was marketed as one that guaranteed tax product legitimacy. In reality, the development process was motivated less by quality concerns and more by protability and market
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potential Rostain 2006. KPMGs own internal documents recommended deceptive hard-sell tactics like making misleading statements to convince uninterested or hesitant clients Permanent Subcommittee 2005, 42. Compliance with the Form and Not the Substance of the Law While aggressive marketing placed commercial interests ahead of client advocate responsibilities, legal compliance of form over substance subjugated public interest responsibilities to self-interest. Many tax shelters produced unwarranted or unintended results even though they complied with the literal language of specic tax provisions. They had no business purpose or economic substance other than to reduce taxes Permanent Subcommittee 2005, 1. For example, SC2, a KPMG tax shelter, had very little economic substance in spite of its legal form Permanent Subcommittee 2005, 29, 30. Such an outcome results from using regulatory arbitrage as a rationale to support decisions. Such an approach demonstrates a disregard for substantive compliance with the tax system and signals a primary concern for commercial selfinterest over the public and even clients interest. Avoiding Detection Because the legal substance of many tax shelters was somewhat spurious, the Big 4 accounting rms took explicit steps to create a high degree of secrecy Wang 2003, 1250. For example, KPMG concealed its tax shelters by refusing to register shelters with the IRS, restricting le documentation, and using improper reporting techniques Minority Staff 2003. In addition to nontransparent reporting, rms took steps to conceal the marketing of shelters Wang 2003, 1250; Permanent Subcommittee 2005, 65. For example, many tax shelter transactions required that taxpayers sign a nondisclosure agreement4 Sikka and Hampton 2005, 333. In some cases, rms were alleged to have purposefully limited a tax shelters sales in order to evade scrutiny Wang 2003, 1250. For example, KPMG stopped sale of tax products after one or two years in order to limit the evidence and make it more difcult for the IRS to detect the activity Permanent Subcommittee 2005, 55. Failure to Properly Consider Professional Practice and Ethical Dimensions These nontransparent activities demonstrate that accounting rms, including KPMG, failed to properly consider ethical responsibilities in the pursuit of prot. KPMG failed to appropriately handle other professional responsibilities including contingent fees, auditor independence, and conicts of interest Permanent Subcommittee 2005, 66. KPMG charged contingent fees based on the amount of tax savings from tax shelters Smith 2004. Although these fees may have been structured in a way that was legal, the position can be taken that such fees based on projected client tax savings were contingent fees prohibited by AICPA Rule 302 Permanent Subcommittee 2005, 67. Of deeper concern is the ethical question as to whether such fees create incentives inconsistent with the role and objectives of the public accounting profession.5 Auditor independence was another ethics issue. KPMG used nancial service rms it audited, like Deutsche Bank, at various times to help market and implement KPMG tax products Permanent Subcommittee 2005, 69. Like other rms, KPMG also took advantage of the auditor-client relationship and marketed tax products to its own audit clients Permanent Subcommittee 2005, 70. This
4

To some extent, such behavior may be justied by virtue of the need to protect the rms intellectual property from being dissipated. However, even this would signal a trend toward commercialism rather than the operation of a profession with the public interest at heart. The committee also noted that Many states prohibit accounting rms from charging contingent fees due to the improper incentives they create Permanent Subcommittee 2005, 67. Volume 10, 2010

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created a conict of interest and compromised auditor independence Rostain 2006, 111. As a result, KPMG failed to use disinterested professional skepticism in making its decisions Rostain 2006, 112, 113. Social Costs and Loss of Public Trust This failure to meet professional responsibilities resulted in signicant social costs, including unintended wealth redistributions. The sale of tax shelters shifts tax burdens to less mobile capital and less well-off citizens. It also erodes the tax base and brings the rms into direct conict with the state Sikka and Hampton 2005, 325. Furthermore, the tax shelter industry ultimately undermines the public condence in the tax system and in the tax profession. For a profession grounded in the public trust and the responsibility to promote the public interest, this is a signicant cost. By placing pursuit of personal gain ahead of client advocate and public interest responsibilities, rms lost the trust of clients, employees, and the public. In KPMGs case, one clients reported comments aptly highlight this loss of condence not only in the rm but in the accounting profession more generally: KPMGs fees were more important than their integrity and honesty to their client and protecting their clients. So lets keep on selling it. If the IRS doesnt audit it, were ne. I trusted the quality and reputation of one of the largest accounting rms in the world. I guess you cannot even do that anymore. I do not know who you can trust. Smith 2004 Ultimately, the root of the problem lies in the loss of understanding of the professions public interest role. Although it is possible to restore the notion of the public interest and the professional obligation of placing public over personal interest, the challenges in redressing the shift in thinking that occurred in recent decades are substantial. It is to these challenges that we turn our attention in the following section.

RESTORING THE IDEAL: RECOMMENDATIONS FOR REFORM


In the previous two sections, we have examined both the normative model for the tax profession how things should be and the way in which the current reality has deviated from this prescribed norm. In fact, based on the tax shelter examples outlined, current practice has deviated so far from the normative model we outlined earlier as to call into question the ability of tax practitioners to claim professional status. More than a decade ago, Brody and Masselli 1996 noted that increased preparer penalties were related to IRS concerns that practitioners were not displaying an appropriate level of loyalty to the tax system. This could be interpreted as implying that practitioners were not meeting the public interest obligation embodied in the notion of profession. In the past two years we have seen attempts by Congress to again strengthen preparer penalty standards, implying a loss of professional freedom and status. Rather than self-regulation by the profession, we are seeing an increased encroachment by government. In this paper, we advocate cultural changes aimed at restoring the self-regulatory public interest focus of the profession. Such a focus depends on the foundational elements of character and competence. Our cultural changes involve three groups: the tax system, the profession, and the academy. We discuss these recommendations in the context of the fraud triangle/trust violation analysis shown in Figure 4. Although we advocate solutions that address and limit each of the fraud triangle elements, we suggest that ultimately change will only be successful if it is internally based that is, practitioners must collectively and individually ascribe to the professional obligation to serve the public interest. Additional external reforms without corresponding internal reforms simply perpetuate an illusion of control Rosanas and Velilla 2005, 87; Dermer and Lucas 1986, 471. Internal self-regulatory reforms control an individuals rationalization as well as inuence moral incentives in the fraud triangle see Figure 4.
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FIGURE 4 Restorative: Cultural Recommendations for the Tax System, the Profession, and Academia to Improve Professional Character and Competence
Incentives: 1. Tax system: Modify regulatory economic and social disincentives and sanctions. 2. Profession: Modify professional economic and social disincentives and sanctions.

Opportunity: 1. Tax system: Modify regulatory monitoring and enforcement activities. 2. Profession: Modify selfregulatory monitoring and enforcement activities.

Rationalization: 1. Profession: Create a professional culture that fosters selfregulatory character and competence development. 2. Academia: Create an academic culture that fosters professional development of both competence and character through: a. Comprehensive instruction b. Diverse research

We explore these recommendations in detail below. External Opportunities and Incentives Necessary systemic changes were recommended by the Permanent Subcommittee 2005 at both the tax system and profession level to limit future abusive behavior. These can be categorized into reforms that limit opportunities for abusive behavior and reforms that limit incentives for abusive behavior. We provide a summary of the Permanent Subcommittee 2005 recommendations in Table 1. Changes designed to limit opportunity center around modications to the tax system to improve clarity and transparency such as strengthening the economic substance doctrine and strengthening the Circular 230 rules and to increase monitoring and enforcement not only by the IRS, but also by the Department of Justice and federal bank regulators. The Permanent Subcommittee 2005 similarly recommended profession-based reforms such as AICPA-mandated rules of conduct for tax shelters, mass marketing, and other activities. These recommended monitoring and enforcement changes are intended to limit opportunities for future trust violations. With regard to reducing the incentives for future trust violations, the Permanent Subcommittee 2005 recommendations focused on strengthened civil penalties for tax evasion tax system reform and strengthened professional sanctions for inappropriate behavior profession-based reform.
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TABLE 1 Recommended External Reformsa Panel A: Reforms Limiting the Opportunities for Abusive Tax Behavior Tax System Reforms Reforms Improving Clarity and Transparency Strengthen and clarify the Circular 230 rules Reduce uncertainty through legislation clarifying and strengthening the economic substance doctrine Improve transparency by requiring the IRS to disclose relevant tax shelter information to other agencies such as the PCAOB Reforms to Monitoring and Enforcement Activities Increased IRS funding for more enforcement personnel and increased enforcement activities Conduct a review of tax shelter activities at major law rms by both the U.S. Department of Justice and IRS Conduct a review of tax shelter activities at major banks by the IRS and federal bank regulators Review of tax shelter activities at nancial services rms by the SEC to limit such rms from aiding and abetting tax evasion by third parties Review tax shelter activities at charitable organizations Profession Reforms The AICPA should establish and clarify rules of conduct and procedures for tax shelters, mass marketing, and other activities The PCAOB should strengthen and nalize proposed rules restricting tax services provided to audit clients, contingent fees, and aggressive marketing tactics Panel B: Reforms Addressing the Incentives to Engage in Abusive Tax Behavior Tax System Reforms Strengthened civil penalties for tax evasion Profession Reforms Strengthen sanctions on unprofessional behavior
a

These reforms are taken from the Permanent Subcommittee 2005 and Minority Staff 2003 reports, among other sources.

One interesting rst step toward tax system reform has been the recent changes to the standards tax preparers must meet to avoid penalties. Prior to the surprise changes in 2007, preparers were required only to meet a realistic possibility standard, implying a condence level of one in three that their position would be sustained in a court of law.6 In 2007, regulators initially raised the bar and required practitioners to meet the more likely than not standard, implying a
6

The realistic possibility standard is dened in U.S. Treasury Department Circular 230. The IRS has provided interim guidance that substantial authority has the same meaning as in Regulation Section 1.6662-4d2. Volume 10, 2010

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condence level of greater than 50 percent. This change represented a step in the direction of limiting aggressive tax planning opportunities, but also represented a signicant encroachment by government on the freedom enjoyed by the profession. Recently, after much concern in the tax community, Congress retroactively revised the standard downward to a requirement that tax preparers have substantial authority for positions adopted. What these changes signal, however, is that unless practitioners take seriously their professional self-regulatory public interest obligation, government regulators will systemically regulate and limit profession behavior in order to protect the public interest and maintain the integrity of the tax system. Internal Rationalization While these external tax system and profession-based changes are necessary, they are not sufcient to re-focus the professions attention on its public interest role. External reforms alone perpetuate an illusion of control Rosanas and Velilla 2005, 87; Dermer and Lucas 1986, 471. Tax system changes ultimately attempt to control practitioner behavior by limiting opportunities and countering incentives. Nonetheless, real change is unlikely unless external changes are reinforced by internal changes. It is interesting to note the comments of former IRS Commissioner Charles Rossotti, who suggests that tax shelter activity is likely to rebound even following the proposed reforms because the fundamental factors that drove the behavior are unchanged Smith 2004. In this paper, we suggest that cultural reforms in the accounting community are necessary in order to develop practitioners competence and character and to restore the public interest directive embodied in the notion of profession. These cultural changes should come from the profession and from academia and are presented in Table 2. Some of the proposed recommendations are similar to the professional development recommendations made in Cheffers and Pakaluk 2007. Our suggested reforms are broad enough to be generalizable, yet specic enough to be substantive. The Profession Fundamentally, what is needed for real character development is a renewed commitment to, communication of, and training in professionalism. Sikka and Hampton 2005, 329 describe public accounting rms as being a part of the contemporary enterprise culture that persuades many to believe that bending the rules for personal gain is a sign of business acumen. This stands in stark contrast to the differentiating public interest perspective of a profession, and we suggest that cultural change in the profession is necessary for real and lasting change to occur. Some evidence of change is emerging, and the Permanent Subcommittee 2005, 6 noted that following the tax shelter investigations, rms have committed to cultural, structural, and institutional changes. It is important, however, that rms not only be seen to be restoring professional character and competence, but are in fact actively committed to genuine change. Such change involves recommitment, communication, and training. A recommitment to professionalism is one cultural change the accounting profession must make to foster professional development. This recommitment can manifest itself in leaderships actions and initiatives. Using stringent ethical criteria in hiring practices also communicates a recommitment to professionalism. An organization can also observe and enforce a clear code of ethics to communicate professional standards and accountability. Accountability should communicate the professional understanding that each practitioner has authority and responsibility for his or her decisions. In addition to communicating professional expectations, an organization should foster an open atmosphere receptive to employee perceptions and supportive of ethical conduct. An organization should also actively train and develop professionalism. This can include creating and supporting an ethics training program. Firms should encourage professionals to develop
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TABLE 2 Recommended Reforms to Improve Professional Character and Competencea Panel A: Profession Reforms Recommit to Professionalism Leadership actively involved in initiatives for professionalism Leadership should act and appear to act in a way above reproach Use stringent ethical criteria in hiring Communicate Professionalism Awareness of organization and employee perceptions by using surveys, suggestion boxes, informal conversations, etc. Open atmosphere supportive of ethical conduct A clear and recognized code of ethics that is observed and enforced Publish widely the rms code of ethics to create a sense of accountability Ensure that each practitioner has genuine authority and responsibility for his or her own decisions Train Professionalism Implement an ethics training program Create incentives by rewarding employees in concrete ways for good judgment Create disincentives by making it clear that unethical conduct is punished including dismissal in serious cases Panel B: Academia Reforms Research A greater diversity in research and reduced emphasis on so-called scientic methods that eliminate awareness of moral judgments Explicitly encourage research into ethics Teaching Model high ethical ideals for students to serve as an example and mentor for them Present education as part of professional training and part of a unied life of integrity Broaden education to include professional character development as well as competence development Focus the teaching of accounting in explicitly professional schools like law and medicine as per the U.S. Treasury 2008 recommendation
a

These modied reforms are based on recommendations in Cheffers and Pakaluk 2007 and the U.S. Treasury 2008 report.

a unity of life marked by integrity and service, and foster involvement in community service activities Cheffers and Pakaluk 2007. Additionally, rms must develop concrete incentives to
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reward good judgment and professional actions and introduce clear disincentives for unethical conduct. Through recommitment, communication, and training, the profession can make cultural changes to foster professional character and competence development. Academia Business schools play a crucial role in developing professionals who exhibit both competence and character. Collectively, we need to accept and meet this responsibility. Ghoshal 2005, 75 suggests that weas business school facultyneed to own up to our own role in the ethical failures that have plagued the business world in recent years. He attributes part of the problem to business school teaching and research that largely excludes ethics and morality and instead legitimizes aggressive self-seeking behaviors. Similarly, Cohen and Holder-Webb 2006, 19 suggest that we as accounting educators must ask ourselves how much responsibility we collectively bear for this apparent decay. To the extent that business schools are failing to equip students with the ethical sensitivities required in their profession, change is required. We see the problem and the solution as being applicable both in the context of business school research and in business school teaching, which are closely interrelated. We address each of these in turn. According to Ghoshal 2005, the central problem with business school research is that business researchers have sought over a long period of time to make our endeavors increasingly scientic, and therefore more respected. He suggests that in the quest for scientic status, however, business researchers have essentially removed all notions of morality, ethics, and human intentionality because the scientic approach leaves no room for such factors. Rather, science requires causal determinism and the ability to reduce complex situations to manageable mathematical models. As Bennis and OToole 2005, 98 note, the scientic model is predicated on the faulty assumption that business is an academic discipline like chemistry or geology. This faulty premise has had adverse consequences. A particular consequence of adopting the so-called scientic approach is that we have in fact legitimized inappropriate behaviors and we have actively freed students from any sense of moral responsibility Ghoshal 2005, 76. In the words of Ferraro et al. 2005, 14, the core economic assumption of self-interest is a prediction about how people will behave, but it also serves as a norm that regulates behavior emphasis added. Essentially, according to Ferraro et al. 2005, if the theories we teach assume that managers will act in opportunistic ways, we effectively teach that such behavior is normal and, by implication, acceptable. If indeed business school research is actually creating the very conditions the theories purport to explain, this is a damning indictment on business school teaching and research and one which needs to be taken seriously for real change to occur. Furthermore, by inappropriately emphasizing only so-called scientic research, business researchers have substantially downplayed alternative forms of research, including research in ethics. As Tuttle and Dillard 2007 show, the homogenization of accounting research seems more likely a reection of institutional isomorphism pressures than a competitive market outcome. Business schools need to commit to and communicate a greater diversity in research to counter these problems. Educators need to commit to, communicate, and train professionalism in the classroom as well Shaub and Fisher 2008. Professional character and competence development problems arise when agency theory assumptions of aggressive self-interested behaviors become self-fullling prophesies and business topics are taught in an ethical vacuum Ghoshal 2005; Ferraro et al. 2005; Cohen and Holder-Webb 2006. Professional behavior is guided less by self-interested incentives and more by service-oriented motives. Instructors can commit to and model these high service-oriented professional ideals for students in their actions and interactions with students.
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Business education can be presented as part of professional training and practice Shaub and Fisher 2008. It is part of a unied and complete life guided by integrity. Professional education takes a holistic perspective. One possibility for increasing the professional emphasis in accounting may be to pursue a model involving post-graduate professional schools of accounting similar to schools of medicine and law, an idea suggested in the Treasury report on the auditing profession U.S. Treasury Department Advisory Committee on the Auditing Profession 2008. Complete professional education involves more than competence and skill development. As Dillard 2008, 13 notes, the public expects universities to transcend the production of accounting technicians by exploring the societal role of accounting, integrating and enhancing technical competence with an understanding of the complex responsibilities of accounting to organizations, society, and the environment. To the extent that students are not exposed to this kind of thinking by professors, it is unsurprising that they fail to see their responsibilities as anything greater than minimizing the clients tax liability by any mechanism possible. Several state boards of accountancy have responded to this need. Texas requires a three-semester-hour course in ethics as a prerequisite education requirement for CPA examination candidates, and three other state boards of accountancy Maryland, New York, and Nebraska also have ethics education prerequisites for CPA licensure Hurtt and Thomas 2008. To some extent, the problem may lie in the training of professors. The increasingly narrow emphasis of accounting Ph.D. programs Lee 1995; Schwartz et al. 2005; Cohen and HolderWebb 2006; Williams et al. 2006; Shaub and Fisher 2008 leaves the greater majority of accounting professors without the tools with which to explore the ethical dimensions of our discipline. Equipping professors with such tools is necessary, as is encouraging professors to explore the dimensions of our profession beyond abstract models and capital markets-based research. A lack of competence in professors is not a valid reason for a decient, incomplete educational process that does not instill professional character and competence in our students. Character development is an important part of the development of trustworthy professionals. It should be an integral part of our restorative professional education process.

CONCLUSIONS
Although tax practitioners claim professional status, behavior over the past decade casts some doubt on whether tax practitioners take seriously the professional obligation to serve the public interest. The cost of ignoring the public interest role is a loss of professional freedom and increasing government regulation of the profession. Using a fraud triangle framework, our analysis provides an overview of the normative ideal for the tax profession against which we may compare current developments within the profession. The framework suggests that for a trust violation to occur, three factors must be present: opportunity, incentive, and rationalization. We suggest that a true understanding of the service-oriented notion of profession self-regulates the professional and limits rationalization even in the presence of incentives and opportunity. Client advocate and tax system responsibilities take precedence over self-interest and necessitate a balancing of client interests with the public interest. Our comparison of the normative ideal with the tax shelter activity engaged in by leading public accounting rms provides an example of professional failure and trust violation. The fundamental cause of this failure is the loss of a public interest emphasis within the accounting profession leading to a focus on the pursuit of self-interest. In response to the failure of the profession to recognize its public interest obligations, we propose reforms to the tax system, the profession, and the accounting academy. While we agree with and support many of the governments proposed changes to the tax system and the profession, we recognize the fundamental necessity of cultural changes to the profession and academia. Such changes are necessary in order to deAccounting and the Public Interest American Accounting Association Volume 10, 2010

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velop practitioners character as well as their competence. Collectively, these reforms aim to realign the interests of tax practitioners with the public interest perspective required of any profession. We suggest that unless deliberate steps are taken to restore the public interest perspective to tax practice, the errors of the past will inevitably be repeated. As former Commissioners Shapiro and Everson have noted, the IRS simply cannot administer the system alone but rather relies on the inputs of tax practitioners. The failure of the profession to step up and meet this challenge poses a signicant risk to the sustainability of the tax system. We conclude by noting former Commissioner Eversons comment that balancing the client and public interest is a delicate balance, and one that requires integrity Pickard 2005, 31. Restoring the appropriate balance will necessitate a return to an emphasis on integrity and the professions responsibility to serve public interest.

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