Washington (July 16, 2004) — The right of accounting firms to offer tax services to their 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 can of worms 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 the SOX auditor independence requirements, 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 to their clients, provided the acceptance of those services is approved by the company’s audit committee.

The list of “impermissible” non-audit services that accountants may offer their audit clients is not carved in stone, however. SOX specifically authorizes PCAOB to revisit and issue regulations prohibiting additional services by auditors, including tax services.

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

According to the PCAOB chief, “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.”

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 cross 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,” he told the meeting.

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 told the group.

— Ken Rankin

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