SEC approves new PCAOB rule and rule amendment related to independence and tax services

By Cydney Posner

In late August, the SEC approved a new rule and a rule amendment filed by the PCAOB relating to the PCAOB's ethics and independence rules.

The new rule is Ethics and Independence Rule 3526, Communication with Audit Committees Concerning Independence, which is intended to build on the communication requirements in interim standard ISB No. 1. Currently, ISB No. 1 provides that, at least annually, an auditor must:

• disclose to the audit committee of the company (or the board of directors if there is no audit committee), in writing, all relationships between the auditor and its related entities and the company and its related entities that in the auditor’s professional judgment may reasonably be thought to bear on independence;
• confirm in the letter that, in its professional judgment, it is independent of the company within the meaning of the Securities Acts administered by the SEC; and
• discuss the auditor's independence with the audit committee.

The SEC also approved a proposed amendment to Rule 3523, Tax Services for Persons in Financial Reporting Oversight Roles, providing that it will no longer apply to the provision of tax services to persons in financial reporting oversight roles during the portion of the audit period that precedes the professional engagement period. The PCAOB's previously adopted Ethics and Independence Rules Concerning Independence, Tax Services and Contingent Fees included Rule 3523, which prohibited independent audit firms from providing any tax service to any person who fills a financial reporting oversight role at an audit client, or an immediate family member of that individual, unless the person is in that role solely because he or she is a member of the board of directors or similar management governing body. (See my email of 4/21/06 pasted below.) However, the question remained open as to whether the provision by the auditor of these tax services before becoming the auditor of record, even though during the audit period, necessarily presented the same appearance-of-conflict issues as the auditor's provision of these services while serving as the auditor of record. (The "audit period" is the period covered by any financial statements being audited or reviewed. The "professional engagement period" is the period beginning when the accounting firm either signs the initial engagement letter or begins audit procedures, whichever is earlier, and ends when the audit client or the accounting firm notifies the SEC that the client is no longer that firm’s audit client.) The amendment to PCAOB Rule 3523 provides that Rule 3523 will not apply to tax services when those services are provided during the audit period and are completed before the professional engagement period begins. Rule 3523 continues to apply to tax services provided during the professional engagement period.

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