The Public Company Accounting Oversight Board, which oversees the auditing profession, has unanimously adopted a rule proposed last December that would ban auditors from providing certain tax-shelter advice to their clients.
“This will keep auditors out of aggressive tax work that has so damaged investor confidence,” said PCAOB chairman William McDonough at Tuesday’s meeting of the board, according to Reuters. Indeed, the Big Four accounting firms all have exited the tax-shelter advisory market in the face of recent scandals involving such services.
The new rules — part of an effort to reduce conflicts of interest and strengthen auditor independence — will not limit routine tax-return preparation and tax compliance, general tax planning, and some other tax work, Reuters reported.
The PCAOB cited three circumstances in which an auditor’s independence would be impaired if it offered tax services:
• If the firm enters into a contingent fee arrangement with an audit client.
• If the firm provides services related to marketing, planning, or opining in favor of the tax treatment of a confidential transaction, or if the services are for a transaction that is based on aggressive interpretation of applicable tax laws and regulations.
• If the firm provides tax services to certain members of management who serve in financial-reporting oversight roles at an audit client, or to their immediate family.
The PCAOB’s new rules also strengthen auditor responsibilities when a firm seeks pre-approval of tax services from a client’s tax committee. The audit firm would be required to describe the proposed services in writing for the audit committee, to discuss with the committee the their potential effects on the firm’s independence, and to document that discussion.
On Tuesday the board also approved Auditing Standard No. 4, which guides auditors on reporting whether a previously reported material weakness continues to exist. The standard is a voluntary measure that allows companies that have disclosed a material weakness to have an auditor re-evaluate the problem area at any time, rather that only in the company’s annual report, Reuters reported.
The PCAOB rules must be reviewed by the Securities and Exchange Commission before final approval.