Auditor independence and tax practitioners.

Author:Purcell, Tom
Position:SEC auditor independence rules


* THE SEC's NEW AUDITOR INDEPENDENCE RULES could have a significant effect on some tax practitioners. The SEC includes tax among the non-audit services CPA firms provide.

* AS PROPOSED, THE SEC RULES PUT IN DOUBT whether an auditor can do anything other than review the tax provision in the financial statements or prepare the client's tax returns without further disclosure or impaired independence. The AICPA tax division suggested impairment be determined circumstantially rather than on the basis of a particular service relationship.

* THE FINAL RULES TAKE A MORE MODERATE stance on audit firms providing tax-related services to audit clients. They recognize the important role CPAs play in representing clients in tax matters but provide no guidance on the specific types of tax advocacy that would not impair independence.

* CPAs WILL NEED ADDITIONAL GUIDANCE to implement the final rules. It's unclear, for example, whether lobbying for tax law changes or representing an audit client before state and local government tax authorities will impair independence. And it's still unclear whether CPAs can represent audit clients before the U.S. Tax Court.

* THE SEC ISSUED PRELIMINARY GUIDANCE in January 2001. Among the issues it resolved was that CPAs can prepare tax studies, such as those related to minimizing state income taxes, sales tax distributions, transfer pricing and Lifo conformity, without impairing independence.

The SEC rules may affect all segments of the profession.

Much has been written and many have speculated about the impact the new SEC auditor independence rules (effective February 5, 2001) will have on CPA firms that provide services such as consulting to their SEC audit clients. However, few observers have considered the impact rule 2-01 of regulation X will have on tax practice, which the SEC includes among the other non-audit services CPA firms provide.

Although the work of the Independence Standards Board is ongoing, there are differences between its approach and the one the SEC took. With many voices discussing standards, all CPAs should be concerned with each step in the evolution of these independence standards and the impact they will have on non-audit services. Accordingly, this article discusses both the changes that are found in the final SEC release as well as the key tax provisions in the original proposal that were dropped (for now) or modified.


The SEC was motivated to replace the existing independence rules to "protect the reliability and integrity of the financial statements of public companies." It felt significant structural changes in the accounting profession, including reorganizations and consolidations as well as demographic changes in society, necessitated revising the rules (last amended in 1983) to keep them "relevant, effective and fair."

The new rules focus on three areas that might impair independence, provide some limited exceptions and require most public companies to disclose in the annual proxy statement information about auditor independence. The major factors that might impair independence are

* Investments by auditors and their families in audit clients.

* Employment relationships between auditors or their families and audit clients.

There is a chance a...

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