Tax work by auditors.

The Public Company Accounting Oversight Board (PCAOB) unanimously adopted rules governing audit firms' provision of tax services to public company clients. Once approved by the Securities and Exchange Commission (SEC), the PCAOB's new rules will ban auditors from providing three primary types of tax services to their public company audit clients, including:

* Services involving contingent fee arrangements;

* Marketing, planning or advice in favor of tax treatments considered confidential under PCAOB Rule 3501, or based on an aggressive interpretation of applicable tax laws and regulations, including listed transactions (as defined by Treasury); and

* Services to (1) certain corporate managers who serve in financial reporting oversight roles or (2) their immediate family members.

The new rules promoting the ethics and independence of public company auditors "draw clear lines to distinguish inappropriate services that impair auditor independence from permissible services that are not detrimental" according to PCAOB Chair William J. McDonough.

The rules ban auditor participation in tax-motivated transactions that the IRS has already identified as problematic, that must be kept secret or that do not meet the standard of having at least a 51% chance of being allowable, but also "preserve public companies' ability to look to the expertise of their auditor for garden-variety tax planning advice and compliance assistance."

The PCAOB modified proposed rules it issued in December 2004 to require auditors seeking preapproval to instead provide audit committees a description of the proposed services, rather than the actual engagement letters. Under the final rules, auditors must:

1. Describe proposed tax service engagements in writing for the audit committee;

2. Discuss with the audit committee the potential effects of the services on the firm's independence; and

3. Document the substance of that discussion.

When necessary, the PCAOB can still change an audit firm's practices during inspections; it is already seeing internal reforms in firms.

The final rules also state that an associated person must not cause a violation due to an act or omission the person "knew, or was reckless in not knowing, would directly and substantially contribute" to a violation.

Effective date: The PCAOB rules will not take effect until approved by the SEC, as required by Sarbanes-Oxley Act of 2002 Section 107(b).