PCAOB rules for tax services.

• Position: Public Company Accounting Oversight Board

The Public Company Accounting Oversight Board (PCAOB) voted unanimously to propose for public comment certain ethics and independence rules on tax services.

Background: Section 103(a) of the Sarbanes-Oxley Act of 2002 (SOA) directs the PCAOB to establish "ethics standards to be used by registered public accounting firms in the preparation and issuance of audit reports." SOA Section 103(b) directs the PCAOB to establish rules on auditor independence "as may be necessary or appropriate in the public interest or for the protection of investors, to implement, or as authorized under, Title II "of the SOA.

To implement SOA Title II, the Securities and Exchange Commission (SEC) adopted new independence rules, in early 2003. Neither the SOA nor the SEC's 2003 independence rules prohibit tax services, as long as the services are pre-approved by the company's audit committee and do not fall into one of the categories of expressly prohibited services. (For details, see Goodman, "A Practical Guide to Sarbanes-Oxley," TTA, October 2003, p. 604 (Part I) and November 2003, p. 670 (Part II).)

Ever since the SEC issued its new rules, two types of tax services have raised serious questions from investors, auditors, regulators and others as to the ethics and independence of accounting firms that provide both auditing and tax services.

First, the IRS and the Justice Department brought a number of cases against accounting firms for marketing tax shelter products and, specifically, allegedly failing to register or comply with list maintenance requirements.

Second, audit firms have been criticized for providing tax services (including tax shelter products) to senior executives of public company audit clients. Some commentators have questioned whether an auditor's provision of such services could lead to conflicts of interest.

Over the last year, the PCAOB has evaluated whether an auditor's provision of tax services, or any class of tax services, to an audit client impairs the auditor's independence from that audit client, in fact or appearance. As part of this evaluation, the PCAOB held a public roundtable with individuals representing a variety of viewpoints, including investors, auditors, managers of public companies, governmental officials and others.

Proposed ethics and independence rules: The PCAOB's proposed rules fall into three categories. First, they would identify three circumstances in which the provision of tax services impairs an auditor's...