The Wisconsin Court of Appeals is expected to deliver a decision regarding alleged fraud and negligence against audit firm Grant Thornton LLP by a small Wisconsin manufacturing company.
Arrowhead Systems Inc. is suing the firm for failing to inform the company about a commonly-known tax saving strategy that could have saved the firms millions of dollars, and then allegedly tried to cover up the error.
Thomas Young, the sole shareholder of Arrowhead, specifically asked the managing director of tax services Larry Bovee at Grant Thornton to provide tax planning and tax strategies, including specific tax savings plans. A court brief suggests that Grant Thornton did not ever indicate “that providing such advice was outside the scope of services they would provide or refused to provide such advice,” according to the brief, and Grant Thornton provided much tax advice and plans for Arrowhead. Grant Thornton was compensated at $750 an hour for such services and invoices show “tax consulting” projects for the company.
The case claims that Grant Thornton did not inform its client about the existence of a tax savings strategy called IC-DISC (short for Interest Change Domestic International Sales Corporation) that helped manufacturing companies, like Arrowhead, to lower their taxes. In late 2013, an Arrowhead employee found out about the tax strategy at a conference and asked Grant Thornton why the strategy had not been used. The firm sent an analysis of expected savings had the strategy been used to Arrowhead, showing a savings amount of $124,459, well-below anticipated legal costs for a lawsuit.
Arrowhead later found email correspondence among employees at Grant Thornton, including Bovee, where they appeared to lower the lost benefits. The initial estimate was $563,083, which was adjusted several times by allegedly “falsely excluding 10% of Arrowhead’s export sales and falsely representing the amount of fees required to perform the work,” according to the brief.
Arrowhead began implementing the tax savings strategy in 2014, and saw a significant increase in tax savings by 2015 at $509,333 and over a million dollars in 2016. Arrowhead decided to sue Grant Thornton for negligence, breach of fiduciary duty, and breach of contract. Fraud was later added after discovering the emails about lost savings representation.
Wisconsin circuit courts dismissed the case based on a technicality, where Young had signed engagement letters with Grant Thornton every year from 2007-2012 for doing his taxes and providing other services. The court of appeals is due to deliver a decision in a few weeks, although the pandemic is upending schedules. 
Stephanie Liu is assistant editor of Internal Audit 360°