Sarbanes-Oxley, tax shelters, IRS oversight, and Canadian activities command TEI's attention.

• Position: Recent Activities

The closing days of 2002 and the early days of the new year brought into focus issues of keen importance to Tax Executives Institute and its members. From comments on the auditor independence rules of the Sarbanes-Oxley Act and the Treasury Department's most recent offering on tax shelters, to testimony before the IRS Oversight Board on IRS audit initiatives, to hard-hitting letters on Canada's rules on foreign investment entities and non-resident trusts, the Institute's committees occupied themselves with the subtleties and nuances--and, most of all, the practical effects--of important government actions.

SEC's Auditor Independence Rules

On January 13, 2003, TEI President Drew Glennie submitted a letter to the Securities and Exchange Commission relating to proposed rules strengthening auditor independence. The rules, which grew out of the Sarbanes-Oxley Act of 2002, will significantly affect how companies secure tax services.

In preliminary remarks, TEI observed that "registrants must be able to obtain ... tax services under rules of sufficient clarity of application so that the relatively simple decision of selecting a vendor ... does not itself carry unreasonable burdens or penalties for foot faults." Absent clarification of the rules, TEI said, "qualified vendors for particular services will be effectively disqualified simply out of caution, and both taxpayers and service providers--the marketplace (including the investing public)--will be disserved."

TEI's detailed analysis highlighted the circularity in the application of section 201(g) of the Act, which sets forth a list of prohibited services that by their nature presumptively compromise auditor independence, and section 201(h), which describes activities that may be undertaken by the auditor subject to pre-approval by a registrant's audit committee. The circularity of the Act, TEI said, creates substantial ambiguity and confusion for registrants and their advisers. Indeed, the letter stated, "commentators on the proposed rules have forcefully urged conflicting constructions" of sections (g) and (h) of section 201 and "the final rules must solve the conundrum" and "be capable of clear application."

After reviewing the Act, its legislative history, and various categories of tax services, TEI said that "giving meaningful and practical scope to [sections 201(g) and (h) of the Act] must be a fundamental purpose of the Proposed Rules." The term "tax services" encompasses many different types of activities performed by public accounting firms, law firms, various types of appraisal and evaluation firms, and lobbying and governmental relations specialists. Moreover, TEI said, legal services and accounting services are often inextricably intertwined in the field of federal income taxation. "In many cases," TEI acknowledged, "the availability of these services from the audit firm represents a convenience to companies, but in some cases, especially in foreign jurisdictions, their availability may be critical or even necessary because of the absence of viable or cost-efficient alternatives."

To bring clarity to the auditor independence rules in respect of tax services, TEI recommended that the final rules provide that "tax services should, by virtue of the parenthetical expression in section 201(h), be generally subject to the preapproval process except where the SEC, pursuant to the authority in section 201(g)(9), explicitly holds that the rendering of particular services by the audit firm has too great a potential for impairing auditor independence...