Tax Services Under the Microscope

As promised, the Public Company Accounting Oversight Board this week proposed for comment new rules related to independence and the provision of tax services by firms that audit public companies.

It's no secret that the oversight body has been keeping a close eye on the provision of tax services to audit clients. The board held a public roundtable discussion on the subject earlier this year. And when it unveiled its standards-setting priorities for 2005 last month during a meeting of its Standing Advisory Group, the PCAOB promised that hammering out proposed new ground rules governing the ability of accountants to offer tax services to their audit clients would top its agenda.

The proposed rules, unveiled Tuesday, aim to address two issues that have caused the accounting profession a lot of grief during the past year or so -- whether the provision of certain tax services to audit clients creates a conflicts of interest, and the marketing by some firms of questionable tax shelter strategies.

Differences in opinion between the accounting profession and regulators and the public over what really constitutes a conflict when it comes to auditor independence aren't new. It wasn't long ago that the profession went head to head with regulators in a battle over whether the provision of consulting services to audit clients created a conflict of interest.

To say that the regulatory climate in which firms now operate has changed considerably would perhaps be the understatement of the century. With self-regulation a thing of the past, the profession has by now, hopefully, learned that if it appears in the eyes of the public and the eyes of those charged with overseeing the profession as if it could potentially cause a conflict, it isn't going to fly for long.

As for tax shelters, the crackdown by the Internal Revenue Service and the Department of Justice on the marketing of questionable tax shelter products should have proven deterrent enough for firms that were involved in any dubious strategies to reform their thinking.

That said, the board's proposed rules provide some clear boundaries as to which tax services impair auditor independence. The first no-no is entering into contingent fee arrangements with audit clients. Contingent fee arrangements -- in which the firm's fee is often based on a percentage of savings that they produce for clients -- were already barred by the Securities and Exchange Commission, so this shouldn't come as a shock.

The second and third proposals pertain to tax shelters. Under those proposals, auditor independence is impaired if the firm provides services "related to planning or opining on the tax consequences of a transaction that is a listed or confidential transaction under Treasury regulations," if the firm provides services related to planning or opining on a transaction that is based on an "aggressive interpretation" of applicable tax laws and regulations. The proposal also ban firms from providing tax services to officers in a financial reporting oversight role of an audit client.

Equally as important is what the proposed rules would not prohibit: routine tax return preparation and tax compliance, general tax planning and advice, international assignment tax services, and employee personal tax services are all still okay, as long as they are pre-approved by the audit committee.

In order to get that pre-approval going forward, if the proposed rules are approved, firms will have to supply the audit committee with certain information, to discuss with the audit committee the potential effects of the services on the firm's independence, and to document the substance of that discussion. The proposed rules would also include a general obligation that the auditor must be independent of its audit client throughout the audit and professional engagement period -- in case anyone still needs it spelled out.

It will be interesting to see what kind of comments the board receives on its proposals. The profession's receptivity to the proposals -- or lack thereof, as the case may be -- will afford the public a chance to see how much the accounting profession has really changed post-Sarbanes-Oxley.

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