PCAOB Proposes New Rules on Independence and Tax Services

By: Cydney Posner

The PCAOB has proposed new rules regarding auditor independence and tax services. For press release, click here. 

The PCAOB believes that, since the SEC issued its new rules regarding auditor independence pursuant to SOX, certain types of tax services have raised serious questions relating to the ethics and independence of accounting firms that provide both auditing and tax services. The PCAOB's proposed rules affect three areas.

Conduct that impairs independence. First, the proposed rules would identify three circumstances in which the provision of tax services impairs an auditor's independence:

• if the registered public accounting firms enter into contingent fee arrangements with their audit clients;
• if the registered public accounting firm provides services related to planning or opining on the tax consequences of a transaction that is a listed or confidential transaction under Treasury regulations or if the firm provides services related to planning or opining on a transaction that is based on an aggressive interpretation of applicable tax laws and regulations;
• if the registered public accounting firm provides tax services to officers in a financial reporting oversight role of an audit client.

Enhanced pre-approval requirement. Second, the proposed rules strengthen the auditor's responsibilities in connection with seeking audit committee pre-approval of tax services. Under the proposed rules, a registered public accounting firm that seeks such pre-approval would be required to supply the audit committee with certain information; discuss with the audit committee the potential effects of the services on the firm's independence and to document the substance of that discussion.

Ethics rule. Third, the proposed rules 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 the violation. The proposed rules would include a general obligation requiring registered public accounting firms to be independent of their audit clients throughout the audit and professional engagement period.

Other Tax Services. The release discusses other types of tax services that would not be prohibited under the proposed rules, including 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 will submit the proposals to the SEC for approval. The SEC's Chief Accountant, Donald T. Nicolaisen, stated that he welcomed PCAOB involvement in this area.

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