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Nothing For Nothing: HP Pays Dearly For Ernst & Young Tax Testimony

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Last September Senator Carl Levin’s Permanent Subcommittee on Investigations called auditor Ernst & Young to Washington DC to explain how its client HP moves profits offshore to avoid taxes. Beth Carr, the partner responsible for the tax-related services provided to audit client HP, testified on behalf of Ernst & Young. Ernst & Young’s testimony cost HP almost $2 million dollars, according to HP's latest proxy.

All other fees included reimbursement of approximately $2.0 million in costs relating to responding to a request for EY information from, and EY providing testimony before, the U.S. Senate Permanent Subcommittee on Investigations relating to taxation of earnings generated outside of the United States as well as fees for advisory services relating to HP’s services business.

The $2 million paid to Ernst & Young for showing up is shown as “Other” advisory fees, not audit-related or even tax services, in the proxy. For that much walking around money, I'm sure the firm, and Ms. Carr, are more than willing to sit through some grilling by Levin.

HP and Microsoft were singled out in this hearing, "Offshore Profit Shifting and the U.S. Tax Code," for practices multinationals such as Google, Amazon, and Starbucks, and their Big Four accounting firm advisors, are also suddenly under heavy fire for, both here and in the UK.

The largest audit firms don't get called out by Congress very often. None of them - not even Lehman Brothers auditor Ernst & Young - was ever asked by Congress to explain what happened during the financial crisis. In December of 2011, Deloitte testified before the Senate Committee on Banking, Housing and Urban Affairs about its role as an "independent" consultant for JPMorgan Chase in the OCC/Fed mandated foreclosure reviews. That testimony was an information request, not an adversarial encounter.

That’s how it typically goes in DC for the global audit firms, made easier still by the millions they spend on lobbying on both sides of the aisle. In spite of Deloitte’s reassurances about the foreclosure reviews that day in December 2011, that lucrative advisory engagement ended abruptly for all the "independent consultants" at the end of last year.  The OCC/Fed said excessive amounts had been spent by the banks on consultants with no tangible results, or compensation, for injured borrowers.

Ernst & Young is already under investigation by the SEC, according to Reuters reports, for providing tax lobbying services to other audit clients, a potential auditor independence violation.

The Securities and Exchange Commission is investigating whether auditing company Ernst & Young violated auditor rules by letting its lobbying unit perform work for several major audit clients…The SEC inquiry began shortly after Reuters reported in March 2012 that Washington Council Ernst & Young, the E&Y unit, was registered as a lobbyist for several corporate audit clients including Amgen Inc, CVS Caremark Corp and Verizon Communications Inc according to one of the sources.

U.S. independence rules bar auditors from serving in an "advocacy role" for audit clients.

Ernst & Young spokeswoman Amy Call Well said, “The information and testimony provided by Ernst & Young was in response to the Subcommittee's specific request, not as a lobbyist or advocate.”

Senator Carl Levin’s office did not have a comment on the story.

HP’s spokesperson Michael Thacker declined to comment, “at this time beyond what we state in our filing” regarding EY's services to HP for the hearing, including the additional advisory services to HP's Services business. “I understand E&Y sent a statement, and I can confirm that their statement is accurate,” he said.

Microsoft, who is not an audit client of Ernst & Young, pays the firm’s lobbying arm $240,000 a year to talk to senators and congressman about Microsoft's tax agenda. Microsoft was also on the hot seat with Levin that day. Let’s hope Microsoft didn’t get billed by Ernst & Young for the same testimony and travel expenses HP did.

Microsoft did not respond to an email request for comment.