By: Cydney Posner

The PCAOB has adopted several new standards relating to independence and remediation of material weaknesses. These standards are subject to approval by the SEC.  See: Press release.

The standard related to remediation of material weaknesses establishes requirements and provides direction that applies when an auditor is engaged to report on whether a previously reported material weakness in internal control over financial reporting continues to exist as of a date specified by management. (See News Brief from 3/31/05.) Among the changes to the proposal are modifications adding guidance on the subjects of materiality, control objectives and substantive procedures, as well as a new responsibility for the auditor to inform the audit committee if the auditor identifies a new material weakness during an engagement performed under this standard.

The independence standards (see News Brief from 12/14/04) relate to three areas:

  • The first area addresses the impairment of auditor independence as a result of the provision of tax services in the context of :
    • Entry by the audit firm into contingent fee arrangements with its audit clients;
    • Providing services related to marketing, planning or opining in favor of the tax treatment of a transaction that is a confidential transaction (as defined) or based on an aggressive interpretation of applicable tax laws and regulations; and
    • Providing tax services to certain members of management who serve in financial reporting oversight roles at an audit client or to immediate family members of such persons.
  • Second, the rules would require a registered public accounting firm that seeks pre-approval of tax services to describe proposed tax services engagements, in writing, for the audit committee, to discuss with the audit committee the potential effects of the services on the firm's independence and to document the substance of that discussion.
  • Third, the rules 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 that the person knew, or was reckless in not knowing, would directly and substantially contribute to the violation. In addition, the rules include a general obligation requiring a registered public accounting firm and its associated persons to be independent of the firm’s audit clients throughout the audit and professional engagement period.
These new rules are in reaction to concerns by the Congress, SEC and PCAOB that audit firms have been marketing abusive or at least questionable tax shelter products to their audit clients. The PCAOB has elected to limit the prohibition to the types of transactions or advice identified, substantially as proposed, and not to restrict auditors' provision of other kinds of tax services. As a result, auditors may continue to provide to their public company audit clients other kinds of tax services not expressly prohibited by the Board's rules, so long as those services are consistent with the SEC's independence requirements and the auditor and audit committee comply with the audit committee pre-approval requirements.

IRS Circular 230 Notice: To the extent the above constitutes tax advice, under IRS Circular 230 I am obligated to inform you that it cannot be relied upon by you or any other taxpayer to avoid penalties.

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