Boards and auditors face forbidden zones: now that many traditional ways of doing business with an auditor are either flatly prohibited or questionable, prudence dictates the adoption of new policies when engaging an auditor for tax services.

• Author: Andreoli, Brian
• Position: Audit Committee - Auditor independence

AMONG THE MANY and broad effects of the Sarbanes Oxley Act of 2002 (S-O) are significant changes in the interaction between public companies and their outside auditors. If a company mishandles its relationship with its auditor, the company or the auditor may be subject to substantial and increased penalties, and the auditor may be deemed to no longer be independent. In the latter case, the company's financial statements would not have been audited by an independent auditor, violating one of the core requirements of the Securities Exchange Act of 1934.

Given these consequences, public companies are advised not to aggressively test the limits of the auditor independence rules under S-O. Unfortunately, those auditor independence rules are ambiguous in many respects, and indeed remain something of a moving target.

While the Securities and Exchange Commission has adopted auditor independence rules under S-O, the Act also required the SEC to create the Public Company Accounting Oversight Board (PCAOB). The PCAOB has the power to audit the auditors, regulate the industry, and provide rules for interpreting and applying S-O. Thus the PCAOB may "clarify" issues that are currently unclear under the SEC rules. Moreover, such clarifications may not necessarily be prospective only; the PCAOB may take the position that its interpretations break no new ground and thus public companies and their auditors should have always understood the rules.

Problematic ambiguity

While the S-O auditor independence rules affect many aspects of a company's operations, a particularly difficult and ambiguous area is the relationship between a company's tax department and its outside auditor, and the services the auditor may provide. Many traditional choices and ways of doing business with an auditor are now either flatly prohibited or questionable under the current state of the law. Public companies need to adopt policies and procedures that will bring their tax departments in line with the new S-O requirements and to integrate those policies with their overall S-O compliance efforts.

PCAOB member Daniel L. Goelzer has stated that the PCAOB will be inspecting audit firms to see if some kinds of tax services rendered to audit clients raise independence issues. Goelzer would not comment on what type of tax work might be an impermissible non-audit service. Goelzer did say that the PCAOB will be looking to see if tax services put the auditor in the position of auditing its own...