Responding to the new age of transparency.

• Author: McCormally, Timothy J
• Position: Comment

What do the paedophilia crisis in the Catholic Church, the outbreak of SARS, and the corporate accounting/governance/tax-shelter scandals of the past few years have in common? In each of these situations, an institution of trust has come under fire for responding reluctantly and inadequately to breaches of conduct that, while arguably minor in scope, had shaken the confidence of the respected institution itself and the public at large. And in each case, it was the failure to respond with seriousness that undermined the institution's authority and its ability to serve the high ends to which its representatives are committed.

Few commentators have argued convincingly that paedophilia among priests is epidemic (the number of priests involved is considered low by all but the most extreme critics). Similarly, most analyses of SARS have acknowledged that it has claimed fewer lives than influenza each year. Nevertheless, the credibility of the Church and public health establishments was threatened by the perceived denials of the facts, and then responsibility. A good case can be made that the reaction to these situations were out of all proportion to the threats they posed, but trust and confidence are fickle things--once challenged or lost, they are extraordinarily difficult to restore.

So too with corporate governance and corporate tax planning. From Enron to WorldCom, those in public accounting failed at the very thing they were committed to providing--assurance. Are the problems pandemic? Hardly, but the failures of trust were so large--and the initial opposition to restrictions so relentless--that when push came to shove with WorldCom's 2002 earnings restatements, Congress was forced to show that the problems were significant and corrective action was required.

Congress's response to these public accounting failures was the Sarbanes-Oxley Act. That legislation worked a sea change in the relationship between public companies and their auditors, and the touchstones of that change are independence and transparency. Both clearly have relevance to the tax arena, where accounting firms battle with lawyers and other consultants for tax work, and where their involvement in developing and marketing tax products--and then, in some cases, attesting to their financial statement implications--has raised concerns in some quarters. Whether the concerns are justified is not the point; those concerns are driving government policy and public perception.

Thus...