The Public Company Accounting Oversight Board begins deliberations today on whether to draft rules that would restrict accounting firms from providing their audit clients with tax services.
Regulatory direction and public remarks by members of the Board and the Securities and Exchange Commission have hinted for months that accounting firms should brace themselves for the possibility. The Big Four firms have declined to discuss the issue at this stage. A PricewaterhouseCoopers spokesman said simply, “I don't think we will be in a position to comment until after the PCAOB issues its draft rule.”
SEC rules require public companies to file financial statements audited by a public accountant independent of the issuer. Corporate collapses and accounting scandals in recent years have brought independence rules into the spotlight along with a host of other accounting and corporate governance rules.
In 2002, Sarbanes-Oxley specifically carved out eight non-audit services—including bookkeeping, financial information systems services, valuation, actuarial services, internal audit outsourcing, management and HR functions, legal services, and broker/dealer services—as forbidden by auditors, unless specifically permitted by a company’s audit committee. A year later, SEC went a step further to forbid those services entirely. Tax services were openly and heavily debated then, but the SEC decided to leave them untouched, except to remind audit committees of their duty to assure that any tax services offered by audit firms would not compromise independence.
Meanwhile, the Internal Revenue Services has become increasingly aggressive during the past few years, investigating and cracking down on illegal tax shelters. Congressional activity has touched on whether accounting firms should provide tax services to their audit clients.
In July 2004, the PCAOB held a public roundtable to begin exploring whether the nature of certain tax services impairs auditor independence. Donald Nicolaisen, chief accountant with the SEC, acknowledged the long history of audit firms offering tax services, but suggested some tax services may cross the line.
He specifically referenced “highly engineered tax products” sold to numerous buyers, some of which the IRS has found to be abusive. “Personally, I believe that no accounting firm should be in the business of selling these kinds of tax products to their audit clients,” he said. “I’m particularly interested in understanding … an accounting firm providing tax services to executives of audit clients in a firm marketing aggressive tax shelters to its audit clients.”
Bunting
At a recent conference of the American Institute of Certified Public Accountants, AICPA chair Robert Bunting called on CPAs to brace for change and work cooperatively with regulators. “Change is critical to meet the current challenges of the profession,” he said. New rules in audit and tax services might well be among those changes, Bunting said after the conference.
SEC senior assistant chief accountant Edmund W. Bailey spoke at the same conference and echoed continual reminders from regulators that investor confidence in auditor independence is a cornerstone of the capital markets. “Ensuring auditor independence is as important a requirement as ensuring that revenues and expenses are properly classified,” he said.
A variety of related documents and briefing papers are available from the box above, right.
IASB Staff Proposes Amending Embattled Fair Value Option
The International Accounting Standards Board will meet Friday, Dec. 17, to deliberate a new approach to the fair value option associated with its controversial standard on valuing financial instruments.
The IASB has posted on its website proposed amendments to IAS 39 Financial Instruments: Recognition and Measurement, that would make the standard more “principles-based instead of rules-based,” according to an IASB spokesman. The amendments give companies more latitude in deciding when to exercise the fair value option while also requiring demonstration of why fair value provides better information.
The amendments are the work of a handful of board members and the IASB staff, responding to the European Union’s recent decision to adopt its own amended IAS 39. “This is an attempt to find a workable solution to the fair value option problem,” the spokesman said.
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