SEC proposals on auditor independence, non-audit services affect tax practitioners.

AICPA Comments Zero in on Ambiguity in Approach, Tax Minimization

The Securities and Exchange Commission's proposed regulations on auditor independence, while aimed primarily at accountants engaged in audit work, also have great significance for tax practitioners. The Sarbanes-Oxley Act holds that any non-audit service "including tax services" that is not specifically prohibited elsewhere in the law may be provided to audit clients with advance approval of the client's audit committee. The statute applies only to audit relationships with SEC registrants, but the AICPA's concern that Sarbanes-Oxley concepts could "cascade" to the state level (and audits of non-public companies) continues. Substantial limitations on tax services that can be offered by accountants to privately owned audit clients could have serious economic effects on small businesses and small accounting firms.

On Jan. 9, the AICPA responded to the SEC on the entire set of auditor independence proposals (The CPA Letter, Jan.). With respect to tax services, we noted some ambiguity in the Commission's approach. For example, the proposed rule states: "Nothing in these proposed rules is intended to prohibit an accounting firm from providing tax services to its audit clients when those services have been pre-approved by the client's audit committee." Further on, however, the proposal states that the audit firm may not represent a client before "a tax court" since the accountant would then be serving as an advocate for the client, which would impair independence. Another prohibited service is described as "the formulation of tax strategies (e.g., tax shelters) designed to minimize a company's tax obligations."

In still other parts of the SEC's proposed rule, the Commission cites with approval such tax (or tax-driven) services as return preparation, assistance and representation in tax audits and appeals, tax advice for mergers and acquisitions, advice on employee benefit plans, requests for rulings or technical advice, transfer pricing engagements, and cost segregation studies.

The proposals, as published in the Federal Register, take up 38 pages of small print, and while there is a specific section on tax services, references to tax matters are also found in a number of other parts of the proposed rules. The AICPA has requested the SEC to bring its tax service references into one section of the final rule, so that audit committees and auditors will see in one place the types of tax services an auditor may provide. We have also requested a clear statement in the final regulation that most tax services are appropriately provided to clients by their auditing firms.

The Institute also notes its objection to and disagreement with the SEC's language which seems to equate tax minimization with tax shelters. With a tax law as complex as today's Internal Revenue Code, and with numerous alternative ways of reaching business, financial and tax goals, we believe there is nothing inherently suspect about attempting to minimize taxes. Most planning resulting in lower taxes for clients would not be considered "tax shelters" even by the Internal Revenue Service. Indeed, there are provisions in the Code whose specific purpose is to provide a tax minimization incentive for taxpayers to engage in certain types of activities and investments. Accordingly, we ask the SEC to recognize, in its final rule, that tax minimization activities are appropriate and, in fact, are in the public interest.

Nonetheless, we do agree that not all activities resulting in tax minimization are appropriate for a client's auditor, and some could implicate the auditor's independence. We also recognize that Congress, the Treasury Department, the IRS and practitioner organizations such as the AICPA have tried for several years to craft an appropriate definition of "tax shelter" for tax purposes--thus far without success. In attempting to draw a distinguishing line between permissible and non-permissible activities for audit independence purposes, we have suggested to the SEC that advice on tax strategies having no business purpose other than tax avoidance is an appropriate dividing line for activities that should be prohibited to auditing firms registered under the Sarbanes-Oxley Act. An exception should be made for those activities that are specifically permitted by applicable tax law.

The full text of the AICPA response to the SEC (including the discussion of tax services) is available at www.aicpa.org/sarbanes/index.asp.

Acting Chairman of PCAOB Named

On Jan. 8 the SEC designated Charles D. Niemeier to be the Acting Chairman of the PCAOB. Neimeier will serve as Acting Chairman until the SEC selects a permanent chair to replace William Webster, who resigned from the board. Prior to this appointment, Neimeier was the Chief Accountant in the SEC's Division of Enforcement and co-chairman of the agency's Financial Fraud Task Force. He is both an attorney and a CPA.