Accounting for income taxes in the post-SOA world.

• Author: Morris, Katherine D.
• Position: Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act of 2002 (SOA) significantly changed the role of tax advisers who provide services to audit clients. In addition to adhering to Financial Accounting Standards Board Statement (FAS) No. 109, Accounting for Income Taxes, advisers are now expected to know and understand the constraints placed on services to audit clients, and their clients' documentation and attestation of internal controls over tax-related financial statement accounts.

Common issues encountered by tax advisers and auditors range from whether a company has the in-house, technical resources to competently handle tax provisions, internal controls and changes in the underlying tax laws, to whether the company should engage another accounting firm to prepare and/or review its FAS 109 computations.

Clients' decisions will affect whether (1) they obtain a clean audit opinion, (2) their internal auditor can attest to internal controls being in place and being adhered to and (3) they can avoid disclosing a significant deficiency or, worse, a material weakness, in their tax internal controls.

This item reviews recent SOA developments in tax services and how the relationship between tax advisers and their clients has affected the tax functions on which clients rely (such as determining tax contingencies).

The Debate

Which tax services can be offered to public clients? Recent guidance permits providing certain tax services to audit clients. Also, these services are subject to normal audit committee pre-approval requirements, including tax compliance, planning and advice. However, some services are prohibited, such as bookkeeping, valuation, fairness opinions, internal audit and management functions, for example. The guidance clarifies which tax services impair independence. Such services include, but are not limited to, representing an audit client before the Tax Court, a district court or the Federal Court of Claims, and providing other unique tax expertise. However, the guidance permits some special services, such as transfer-pricing and cost-segregation studies. Violations of the independence rules can have serious consequences, such as loss of a client and a re-audit of its financial statements by new, independent auditors.

Some audit firms are concerned about the lack of a clear "bright-line" rule on tax planning and advice. The absence of clarity has caused many firms to limit substantially how they offer tax services to public companies. To further complicate...