In a move triggered by lawmaker's concerns over the marketing of abusive tax shelters by some accounting firms, the Public Company Accounting Oversight Board has proposed new rules restricting the ability of accountants to provide tax services to their audit clients.
If approved in final form by the board and by the Securities and Exchange Commission, the PCAOB's initiative would explicitly prohibit accountants from offering tax services to audit clients on a contingent-fee basis, and bar them from providing any tax services to corporate officers who are "in a reporting oversight role of an audit client."
In addition, the proposal would prohibit audit firms from marketing tax strategies that involve "an aggressive interpretation of applicable tax laws and regulations," or result in a tax avoidance maneuver that is a "listed or confidential" transaction under Treasury Department regulations.
Although the proposed rule sidesteps what PCAOB Chairman William J. McDonough had previously referred to as the "thorny debate over how to define a tax shelter," it does specify that a tax strategy that is "more likely than not" to be denied by the Internal Revenue Service would qualify as an unacceptable scheme.
In proposing the new restrictions, the PCAOB stopped short of bowing to pressure from consumer advocates, who had called for an across-the-board ban on the offering of all tax services by auditors. While outlining the proposal during a December public meeting in Washington, PCAOB chief auditor Douglas Carmichael explained that the board was not prepared to go that far "at this time."
Under the proposal, firms would be allowed to continue offering audit clients general tax planning and advice, as well as routine tax prep services, as long as they are approved by the company's audit committee.
Following a 60-day comment period, the proposal is set to take effect in October 2005.
"Auditors have traditionally performed these kinds of services for their audit clients, and this kind of assistance is particularly important to small and medium-sized businesses that lack the resources to maintain extensive in-house tax expertise," board member Daniel L. Goelzer said in voting to seek public comment on the new restrictions.
For his part, McDonough said that, while it is clear that "some accounting firms have compromised their ethics for self-interest" by promoting abusive tax shelters, the concerns raised by these activities do not justify a complete ban.
The proposal would also require that accountants seeking audit committee approval to offer tax services must discuss the potential impact of those services on the firm's independence. The proposal would also codify as an ethics rule the principle that audit firm personnel should not advocate actions that would result in violations of laws, regulations or professional standards.
The proposal is designed to close what some critics have described as a troubling loophole in the auditor independence provisions of the Sarbanes-Oxley reform act. Those provisions prohibit accountants from providing bookkeeping, appraisal and certain non-audit services to their audit clients, but do not bar them from offering tax services, provided that the arrangement is approved by the company's audit committee.
During a PCAOB roundtable discussion last summer, representatives from the Consumer Federation of America and other groups urged the board to place tighter restrictions on the tax services offered by accountants, with some recommending an across-the-board prohibition.
Significantly, some PCAOB regulators came away from that meeting with a clearer appreciation of the profession's concerns about such a ban.
Board member Kayla Gillan - an outspoken critic of the marketing of non-audit services to audit clients during the 2002 congressional debate on the SOX legislation - said that she changed her tune after listening to the accounting profession's arguments on this issue.
"I learned that the auditor's involvement in a company's decisions about the appropriate tax treatment of some transactions can actually play a significant role in assuring the accuracy not only of annual financial statements but quarterly disclosures as well," she said.
A key force driving the PCAOB in this area was a series of Senate hearings held in November 2003, which produced evidence of potentially abusive tax shelter products marketed through cold-call selling techniques by accounting firms.
By prohibiting the offering of tax strategies that have little support in the tax laws, PCAOB chair McDonough suggested that the new restrictions may insulate accountants from temptation. "The proposed rule should help auditors stay clear of more aggressive tax work that can put them in an inappropriate position of advocating on behalf of a client at the same time they are charged with objectively passing on the fairness of the accounting and presentation," he said.
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