Risk & Compliance

Audit Board Proposes New Ethics Rules

Although the SEC adopted rules last year that permit a company's outside auditor to offer it tax services, too, some services have raised serious q...
Stephen TaubDecember 15, 2004

The Public Company Accounting Oversight Board unanimously approved for public comment new ethics rules concerning independence, tax services, and contingent fees.

In early 2003, noted the PCAOB, the Securities and Exchange Commission adopted new independence rules that don’t prohibit a company’s outside auditor from providing tax services to the company, provided that those services are approved in advance by the company’s audit committee and do not fall into one of the categories of expressly prohibited services.

Since the SEC issued these rules, however, two types of tax services have “raised serious questions from investors, auditors, regulators, and others relating to the ethics and independence of accounting firms that provide both auditing and tax services,” added the PCAOB.

Indeed, late last year, testimony at Senate subcommittee hearings described potentially abusive tax-shelter products marketed by accounting firms. In addition, the Internal Revenue Service and the Department of Justice have brought a number of cases against accounting firms stemming from their marketing of such products. “Some have questioned whether an auditor’s provision of such services could lead to conflicts of interest,” the PCAOB pointed out.

The board’s proposed rules identify three circumstances in which the provision of tax services impairs an auditor’s independence:

• If an auditor enters into a contingent-fee arrangement with a clients;
• If an auditor provides services related to planning or opining on the tax consequences of a listed or confidential transaction under Treasury regulations, or a transaction based on an “aggressive interpretation of tax laws and regulations”;
• or if an auditor provides tax services to officers who have a financial-reporting-oversight role at a client company.

When an accounting firm seeks pre-approval of tax services, the proposed rules would require the firm 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.

In addition, the proposed ethics rules lay a foundation for the PCAOB’s independence rules by codifying that individuals associated with a registered public accounting firm should not cause it to violate relevant laws, rules, and professional standards due to an act or omission the person knew or should have known would contribute to such a violation.

The PCAOB also identified tax services that the proposed rules would not prohibit, including routine tax return preparation and tax compliance, general tax planning and advice, international-assignment tax services, and employee personal tax services.