SEC proposals on auditor independence, non-audit services affect tax practitioners.

AICPA Comments Zero in on Ambiguity in Approach, Tax Minimization

The Securities and Exchange Commission's proposed regulations on auditor independence, while aimed primarily at accountants engaged in audit work, also have great significance for tax practitioners. The Sarbanes-Oxley Act holds that any non-audit service "including tax services" that is not specifically prohibited elsewhere in the law may be provided to audit clients with advance approval of the client's audit committee. The statute applies only to audit relationships with SEC registrants, but the AICPA's concern that Sarbanes-Oxley concepts could "cascade" to the state level (and audits of non-public companies) continues. Substantial limitations on tax services that can be offered by accountants to privately owned audit clients could have serious economic effects on small businesses and small accounting firms.

On Jan. 9, the AICPA responded to the SEC on the entire set of auditor independence proposals (The CPA Letter, Jan.). With respect to tax services, we noted some ambiguity in the Commission's approach. For example, the proposed rule states: "Nothing in these proposed rules is intended to prohibit an accounting firm from providing tax services to its audit clients when those services have been pre-approved by the client's audit committee." Further on, however, the proposal states that the audit firm may not represent a client before "a tax court" since the accountant would then be serving as an advocate for the client, which would impair independence. Another prohibited service is described as "the formulation of tax strategies (e.g., tax shelters) designed to minimize a company's tax obligations."

In still other parts of the SEC's proposed rule, the Commission cites with approval such tax (or tax-driven) services as return preparation, assistance and representation in tax audits and appeals, tax advice for mergers and acquisitions, advice on employee benefit plans, requests for rulings or technical advice, transfer pricing engagements, and cost segregation studies.

The proposals, as published in the Federal Register, take up 38 pages of small print, and while there is a specific section on tax services, references to tax matters are also found in a number of other parts of the proposed rules. The AICPA has requested the SEC to bring its tax service references into one section of the final rule, so that audit committees and auditors will see in one place the types of...