by Ken Rankin

Washington — The right of accounting firms to offer tax services to audit clients — an issue that Congress effectively ducked in drafting the Sarbanes-Oxley Act — is back under active debate in Washington by rulemakers at the Public Company Accounting Oversight Board.

The PCAOB reopened that prickly subject during a day-long “roundtable” discussion with representatives from over two dozen major accounting firms, government regulatory agencies, public interest organizations and investor groups concerned about the independence of auditors who provide tax and other non-audit services to their audit clients.

At issue: whether Securities and Exchange Commission rules implementing the Sarbanes-Oxley auditor independence provisions go far enough to erase what PCAOB Chairman William McDonough called the public’s doubts about “whether accounting firms showed appropriate objectivity in their audit work.”

Under SOX, accountants who audit the financial statements of public companies are prohibited from providing bookkeeping, appraisal and certain non-audit services to their audit clients. The law, however, does not bar auditors from offering tax services, provided that they are approved by the company’s audit committee.

The list of “impermissible” non-audit services is not carved in stone, however. SOX specifically authorizes the PCAOB to revisit and issue regulations prohibiting other services by auditors, including tax services.

In reopening the debate over whether tax services should indeed by prohibited, McDonough said that during the past year “new concerns relating to auditor independence have come to the public’s attention.”

“These concerns relate to the tax services and products that audit firms provide to their clients and the senior executives of those clients, including extremely aggressive, if not abusive, tax strategies that may, by their nature, impair the objectivity of the auditor,” he said.

SEC chief accountant Donald Nicolaisen made it clear that he shared those concerns.

Noting that the Internal Revenue Service has declared a number of the “highly engineered tax products” mass marketed by accounting firms to be “abusive tax shelters,” he suggested that auditors crossed the line by promoting these schemes. “Personally, I believe that no accounting firm should be in the business of selling these kind of tax products to their audit clients.”

IRS Commissioner Mark Everson voiced similar concerns, noting that auditors face clear objectivity problems when they are put in the position of judging the appropriateness of “highly engineered tax products” sold to the audit client by their own firm.

“It’s impossible for me to understand how an auditor can have the same view of a transaction if the firm has an economic interest in the success of that transaction,” he said.

Nicolaisen also said that the SEC staff would like to see the PCAOB assume the role of primary standard-setter and the source of advice and guidance on auditor-independence issues, thereby assuming duties currently held by the SEC.

A number of accounting industry representatives made the case that there are legitimate reasons for companies to secure tax services from their auditor.

Deloitte & Touche partner Scott Bayless argued that many clients prefer to obtain tax services from their outside auditor because of the relationship that exists with the audit firm.

Tom Ochsenschlager, vice president of taxation at the American Institute of CPAs, agreed that many clients see advantages to having tax and audit work handled by the same firm. “The advantage of having the auditor on board with the tax expertise” is that issues associated with the company’s tax returns are “more likely to be spotted, and spotted much earlier in the process,” he said.

Others at the meeting, however, told the PCAOB that mixing tax and audit services creates clear conflicts for auditors.

Consumer Federation of America investor protection director Barbara Roper expressed concern that the independence of auditors could be compromised if they are put in the position of rendering an opinion on the appropriateness of a tax strategy recommended by tax accountants at their own firm.

Meanwhile, AFL-CIO associate general counsel Damon Silvers also called for restrictions on providing tax services to audit clients, arguing that the marketing of tax strategies to audit clients should be banned outright.

PCAOB staff news
Separately, the board named Richard D. Clark as its director at the Office of Financial Analysis and Risk Assessment.

Clark, 63, a retired captain of Naval Reserve Intelligence and a CPA, comes to the board with a 27-year background in forensic accounting. The board said that the office would “collect, assimilate and analyze information from multiple sources and provide assessments of risk and related insights.”

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