The Sarbanes-Oxley Act of 2002 does not prohibit auditors from offering tax services to audit clients.
Messrs. Oates and Goelzer's blunt assertion that the Act "restricts an Auditor's ability to perform for Issuers a number of tax services allowed under the SEC rules" (Page 404) is incorrect: The Act does not change the tax services that accountants may offer their audit clients under the existing SEC rule. Indeed, near the end of their article, Messrs. Oates and Goelzer back away from their original assertion and only speculate that "non-audit tax services previously permitted to be performed by Auditors for Issuers now may well be prohibited." (Page 415.) Saying that services "may well be" prohibited--depending on future interpretations by the SEC--is obviously very different from opining that the Act itself inflexibly imposes that prohibition.
Messrs. Oates and Goelzer's self-contradiction undermines their entire analysis, and their individual arguments do not fare much better. Messrs. Oates and Goelzer make three main points. First, they argue that the Act's prohibitions on certain non-audit services silently eliminate the SEC's existing guidance for tax services under the SEC's current rule. Second, they contend that the ban on legal services applies more broadly than the SEC's current rule, extending to some tax services. Third, they suggest that the Act's restrictions on expert services could also extend to tax services.
In fact, the statutory text and legislative history of the Act contradict Messrs. Oates and Goelzer's views and demonstrate that Congress intended not to reject, but to adopt, the definitional guidance set forth in the SEC's 2000 auditor independence rule--including the rule's definitional exceptions for tax services. As an initial matter, it is undeniable that Congress, in adopting its list of prohibited services, did not include definitions of those services in the statutory text. That does not mean--as Messrs. Oates and Goelzer argue--that Congress prohibited a set of technical accounting services without knowing what those services meant and without providing any guidance, either to the SEC or the courts, about how to interpret the statute. Congress clearly legislated against the backdrop of the SEC's current rule, and closely followed the SEC's list of prohibited non-audit services--even keeping the services in the same order as they appear in that rule. That alone is strong evidence that Congress meant to incorporate the defined terms in the SEC's rule. See McDermott Int'l, Inc. v. Wilander, 498 U.S. 337, 342 (1991) ("In the absence of contrary indication, we assume that when a statute uses such a term [of art], Congress intended it to have its established meaning."). Moreover, the legislative history is clear that Congress--after considering and rejecting alternative definitions--chose to leave the SEC's definitions in place.
I. Tax Services Are Not Included in the List of Prohibited Services
The Sarbanes-Oxley Act establishes two categories of non-audit services. First, the Act sets forth a list of enumerated, prohibited non-audit services. See Sarbanes-Oxley Act, [section] 201. It is unlawful for an auditor to provide these services to an audit client. Significantly, tax services do not appear on this list. Second, the Act allows auditors to provide any non-audit service, "including tax services," that is not described in the enumerated list, with the pre-approval of the audit client's audit committee. Id.
Messrs. Oates and Goelzer argue that despite the inclusion of "tax services" in the second category--the category of permitted non-audit services--many tax services actually fall within the first category of prohibited services. But it is obvious that Congress listed "tax services" among permissible services to make absolutely clear that they do not fall within the list of prohibited services.
As Messrs. Oates and Goelzer recognize, auditors have long provided non-audit tax services relating to appraisals, valuations, and actuarial services. Although the SEC's final rule on auditor independence generally prohibits auditors from providing these services to their audit clients, the rule specifically excepts certain appraisals, valuations, and actuarial services that are performed in the tax context. See, e.g., 17 C.F.R. [subsection] 210.2-01(c)(4)(iii)(B)(3), -01(c)(4)(iv)(B)(3). As the SEC explained, "tax services generally do not create the same independence risks as other non-audit services." 65 Fed. Reg. 76,008, 76,052 (Dec. 5, 2000). This conclusion remained unchallenged when Congress considered the legislation that became the Sarbanes-Oxley Act. No congressional witness criticized the SEC's definitional exceptions for tax services.
Messrs. Oates and Goelzer assert that Congress, defying this consensus, eliminated the exceptions for tax services when it passed the Sarbanes-Oxley Act. They base this conclusion mostly on the fact that "the plain language of Sarbanes-Oxley contains no such exceptions." (Page 406.) Messrs. Oates and Goelzer contend that "any argument that this harsh result was not intended runs directly into both the statutory language and legislative history." (Page 406.) But the text of the Act clearly shows that Congress preserved the ability of auditors to provide tax services to audit clients--indeed, that Congress specifically and expressly preserved tax services. The legislative history confirms that Congress intended to adopt the SEC's definitions of certain enumerated non-audit services, including the SEC's exceptions for appraisal, valuation, and actuarial tax services.
A. The Statutory Text Explicitly Authorizes Tax Services
Congress makes one explicit reference to "tax services" in the text of the Sarbanes-Oxley Act: "A registered public accounting firm may engage in any non-audit service, including tax services, that is not [on the list of prohibited non-audit services], only if the activity is approved in advance by the audit committee of the issuer...." Sarbanes-Oxley Act, [section] 201 (emphasis added). This language clearly reflects Congress's judgment that tax services should not be among the prohibited non-audit services--a point reinforced by the statute's legislative history. See S. REP. No. 107-205, 107th Cong, [2.sup.d] Sess. 51 (2002) (section-by-section analysis of [section] 201) ("A registered public accounting firm would be permitted to perform for a public company audit client any other nonaudit service, including tax services, that the public company's Audit Committee pre-approves in accordance with the [Act].").
Messrs. Oates and Goelzer are thus incorrect when they state that "the statute treats non-audit tax services in the same manner as any other non-audit service" (Page 406), because the Act treats tax services in a more favorable manner than any other non-audit service. And this protection extends to tax services that incorporate elements of appraisal, valuation, and actuarial services that are permissible under the SEC's current rule. Messrs. Oates and Goelzer advance no persuasive interpretation of the "including tax services" language in section 201, and their argument presumes the provision has no independent meaning. Such a presumption, however, violates the well-settled rule that statutes should not be construed in a manner that "render[s] their provisions mere surplusage." Dunn v. Commodity Futures Trading Comm'n, 519 U.S. 465, 472 (1997).
B. The Legislative History Confirms That Congress Intended To Adopt the SEC's Rule Definitions
The legislative history supports this reading of the text by demonstrating that Congress intended to adopt the SEC's regulatory definitions of the prohibited services, including the definitions of appraisal, valuation, and actuarial services, and the definitional exceptions for tax ser vices. Messrs. Oates and Goelzer apparently believe that, because Congress did not cut and paste the SEC's detailed regulatory definitions into the Act, Congress must have intended to reject them.
Such a conclusion is undercut by Congress's express consideration and rejection of proposed changes to the definitions of non-audit services prohibited by the existing SEC rule. The text of the Sarbanes-Oxley Act once contained a provision that would have required the SEC to adopt rules "substantially similar" to its proposed 2000 auditor independence rule, which was more restrictive than the rule that the SEC eventually adopted after the notice and comment period. That provision was deleted from the bill before it was reported out of the Senate Banking Committee. The committee recognized that the result of deleting the provision was that "we will live under the current rules, not the July 2000 [proposed] rules." Markup on the Public Company Accounting Reform and Investor Protection Act of 2002 Before the S. Comm. on Banking, Housing and Urban Affairs, 107th Cong., [2.sup.d] Sess. 34 (2002) (unofficial transcript dated June 18, 2002) (statement of Sen. Bunning). The committee preferred this outcome because the final rule reflected the careful judgment of the SEC, which "worked very hard and held many hearings on this subject." Id. During the floor debate, Senator Dorgan attempted to re-insert the "substantially similar" provision via a floor amendment, but the Senate did not adopt it. See Senate Amendment No. 4216. Supreme Court precedent deems this specific "negative legislative history" to reflect the intent of Congress to continue the existing SEC rule on auditor independence in effect.
The Supreme Court has long discerned legislative intent from Congress's rejection of possible policy options. For example, in 1962, the Court held that certain securities law penalties could not be extended to a particular defendant because "this very broadening of the ... [penalty provision] was considered and rejected by Congress" when it enacted the Securities Exchange Act of 1934. Blau v. Lehman, 368 U.S. 403, 411-12 (1962). In addition, the Court noted that Congress "left the Act as it was' and did not overturn a narrowing judicial interpretation of the provision. Id. at 413. Congress's failure to adopt broader penalty language in 1934 and its failure to amend the Act in light of narrower judicial interpretations led the Court to conclude that Congress intended the penalties to have a narrower reach. See also North Haven Board of Education v. Bell, 456 U.S. 512, 534 (1982) (when "Congress was made aware of the Department [of Education]'s interpretation of the Act and of the controversy surrounding the regulations," its failure to overrule the regulations "lends weight to the argument" that the regulations accurately reflected Congress's intent).
The Court has continued to draw upon negative legislative history in more recent cases. For example, in 2000 the Court determined that the FDA did not have jurisdiction to regulate tobacco products, in part because "Congress considered and rejected bills that would have granted the FDA such jurisdiction." FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120, 144 (2000). The same year, the Court noted in Crosby v. National Foreign Trade Council, 530 U.S. 363,378 (2000), that Congress intended to legislate narrowly with respect to a ban on trade with Burma, based on "the fact that Congress repeatedly considered and rejected" broader legislation. Id. at 378 n.13.
The same principle controls here: Congress considered legislative language that would have required the SEC to abandon its current rule in favor of one containing broader definitions of prohibited services. Congress's decision to reject that broadening language demonstrates that Congress intended to leave in place the definitional guidance set forth in the current rule.
II. Tax Services Are Not Within the Ban on "Legal Services"
Messrs. Oates and Goelzer's second argument is that the Act's ban on legal services is far broader than the SEC's current rule, further limiting the range of tax services that an accountant can provide for an audit client. Although the SEC's 2000 rule provides a definition of "legal services," the Act does not. Thus, Messrs. Oates and Goelzer rest their argument on Congress's not explicitly importing the SEC's explanatory language directly into the statute. Unfortunately, this reasoning sheds no light on what the term "legal services" actually means. Messrs. Oates and Goelzer concede this point, and although they intimate that the ban on legal services significantly restricts the provision of tax services, they offer no solid conclusions: "Whether an Auditor can engage in significant tax planning [under the prohibition on legal services] is a difficult question and one that should be resolved by regulatory guidance from the SEC and the Oversight Board." (Page 412.)
Messrs. Oates and Goelzer claim that there is "no evidence in the text of the statute or in its legislative history that Sarbanes-Oxley was intended to limit the definition of `legal services' in the same manner as the SEC Rules" (page 410), yet they offer no evidence to support their belief that the Act's ban must be broader. They seem to believe that, because Congress did not specifically rule out their interpretation, it must be correct. In fact, the same reasoning and legal authority demonstrating that Congress should be deemed to have adopted the SEC's definitional guidance on appraisal, valuation, and actuarial services also confirm that Congress adopted the SEC's definition of "legal services." As previously discussed, Congress was legislating against the backdrop of hotly-debated and well-publicized rules. It considered and rejected alternative definitions, and let stand the definitions that the SEC set forth in its final 2000 auditor independence rule. Congress's adoption of the SEC's interpretation is eminently sensible, and it renders Messrs. Oates and Goelzer's tortured analysis unnecessary.
III. Tax Services Are Not Within the Ban on "Expert Services"
Finally, Messrs. Oates and Goelzer turn their attention to the Act's prohibition on the provision to audit clients of "expert services" unrelated to the audit. See Sarbanes-Oxley Act, [section] 201. They note, correctly, that the term "expert services" is not defined in the Act. Messrs. Oates and Goelzer use what they characterize as the Act's ambiguity to spin various scenarios about the kinds of services that might be unlawful under the Act, concluding that the provision likely precludes "an Auditor from providing an Issuer with testifying expert services and may preclude an Auditor from providing nontestifying expert services and litigation support services. ... [It] may also preclude Auditors from filing ruling requests on behalf of issuers and providing Issuers with opinions and analyses intended for submission to the IRS." (Page 414.)
Again, Messrs. Oates and Goelzer's conclusions represent an unjustified stretch. The evidence suggests that Congress sought simply to limit the ability of auditors to serve as "witnesses for hire" in support of their audit clients in certain legal proceedings. See S. REP. No. 107-205, at 18. Significantly, the evidence does not support Messrs. Oates and Goelzer's conclusion that Congress intended to forbid every expert tax service that requires the exercise of experience and professional judgment.
Messrs. Oates and Goelzer are correct that the SEC is required to issue regulations to implement the Act's auditor independence provisions by January 26, 2003. See Sarbanes-Oxley Act, [section] 208. These regulations will clarify the statute and should be welcomed by all.
Messrs. Oates and Goelzer are mistaken in their fundamental conclusions, that Congress has inflexibly addressed and resolved these definitional issues and has forbidden the SEC from continuing to use the definitions set forth in its current rule. To the contrary, Congress intended to adopt the SEC's current definitions. In issuing new regulations, the SEC should be guided by the congressional recognition of the definitions in its 2000 rule and should continue to use those defined terms.
Such continuity is not only consistent with the intent of Congress, but it is also sound public policy. The regulatory landscape has changed drastically in the past year, and more changes will be forthcoming as the new Board is established and begins its operations. In this environment, retaining the definitions to which issuers have already adapted themselves will give the markets much-needed certainty and stability.
RICHARD Y. ROBERTS is a partner in the Washington, D.C. office of Thelen Reid & Priest LLP and served as a Commissioner of the Securities and Exchange Commission from 1990 to 1995. Thelen Reid & Priest has represented] accounting firms on various matters.
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|Author:||Roberts, Richard Y.|
|Date:||Sep 1, 2002|
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