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PCAOB rules for tax services.

The Public Company Accounting Oversight Board (PCAOB) voted unanimously to propose for public comment certain ethics and independence rules on tax services.

Background: Section 103(a) of the Sarbanes-Oxley Act of 2002 (SOA) directs the PCAOB to establish "ethics standards to be used by registered public accounting firms in the preparation and issuance of audit reports." SOA Section 103(b) directs the PCAOB to establish rules on auditor independence "as may be necessary or appropriate in the public interest or for the protection of investors, to implement, or as authorized under, Title II "of the SOA.

To implement SOA Title II, the Securities and Exchange Commission (SEC) adopted new independence rules, in early 2003. Neither the SOA nor the SEC's 2003 independence rules prohibit tax services, as long as the services are pre-approved by the company's audit committee and do not fall into one of the categories of expressly prohibited services. (For details, see Goodman, "A Practical Guide to Sarbanes-Oxley," TTA, October 2003, p. 604 (Part I) and November 2003, p. 670 (Part II).)

Ever since the SEC issued its new rules, two types of tax services have raised serious questions from investors, auditors, regulators and others as to the ethics and independence of accounting firms that provide both auditing and tax services.

First, the IRS and the Justice Department brought a number of cases against accounting firms for marketing tax shelter products and, specifically, allegedly failing to register or comply with list maintenance requirements.

Second, audit firms have been criticized for providing tax services (including tax shelter products) to senior executives of public company audit clients. Some commentators have questioned whether an auditor's provision of such services could lead to conflicts of interest.

Over the last year, the PCAOB has evaluated whether an auditor's provision of tax services, or any class of tax services, to an audit client impairs the auditor's independence from that audit client, in fact or appearance. As part of this evaluation, the PCAOB held a public roundtable with individuals representing a variety of viewpoints, including investors, auditors, managers of public companies, governmental officials and others.

Proposed ethics and independence rules: The PCAOB's proposed rules fall into three categories. First, they would identify three circumstances in which the provision of tax services impairs an auditor's independence:

* Proposed Rule 3521 would treat registered public accounting firms as not independent of their audit clients if they enter into contingent fee arrangements with those clients.

* Proposed Rule 3522(a) and (b) would treat a registered public accounting firm as not independent from an audit client if the firm provides services related to planning or opining on the tax consequences of a listed or confidential transaction under Treasury regulations. In addition, proposed Rule 3522(c) would treat a registered public accounting firm as not independent if it provides services related to planning or opining on a transaction based on an aggressive interpretation of applicable tax laws and regulations.

* Proposed Rule 3523 would set a new requirement to treat a registered public accounting firm as not independent if the firm provided tax services to officers that have financial reporting oversight of an audit client.

Second, the proposed rules would further implement the SOA's pre-approval requirement by strengthening the auditor's responsibilities to seek audit committee pre-approval of tax services. Specifically, proposed Rule 3524 would require a registered public accounting firm that seeks such pre-approval to (1) supply the audit committee with certain information; (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.

Third, the rules lay a foundation for the PCAOB's independence rules. Specifically, proposed Rule 3502 would codify, in an ethics rule, the principle that persons associated with a registered public accounting firm should not cause the firm 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 violation. Proposed Rule 3520 would include a general obligation requiring registered public accounting firms to be independent of their audit clients throughout the audit and professional engagement period.

Finally, the proposed rules also include several definitions.

Other tax services: The PCAOB's rulemaking release discusses other types of tax services that the proposed rules would not prohibit, along with the PCAOB's reasoning. These services include routine tax return preparation and tax compliance, general tax planning and advice, international assignment tax services and employee personal tax services.

The PCAOB will consider comments before adopting the rules and submit the proposals to the SEC for approval pursuant to SOA Section 107. Proposals and comments are available on the PCAOB's Website, at, under "Rulemaking."
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Title Annotation:Public Company Accounting Oversight Board
Publication:The Tax Adviser
Date:Mar 1, 2005
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