Strengthening the SEC's auditor independence rules: January 13, 2003.

On January 13, 2003, Tax Executives Institute filed the following comments to the United States Securities and Exchange Commission on the proposed regulations concerning the requirement for auditor independence under the Sarbanes-Oxley legislation.

On behalf of Tax Executives Institute, I am pleased to submit the following comments on Proposed Rule RIN 3235-A173, "Strengthening the Commission's Requirements Regarding Auditor Independence" (the "Proposed Rules"), published in the Federal Register for December 13, 2002, (1) related to the Sarbanes-Oxley Act of 2002 (the "Act"). (2) As the preeminent association of business tax professionals, TEI has a significant interest in maintaining the integrity and vitality of America's self-assessment tax system and the financial reporting system of which the provision for taxes, at the Federal level and the state and local levels in the United States, and for foreign levies as well, is a material part. The Act was passed to address concerns that our members share with the investing public. TEI supports the general purposes of the Act, but urges the Commission' to clarify the application of the rules with respect to rendering tax services.

Stated simply, registrants must be able to obtain these tax services under rules of sufficient clarity of application so that the relatively simple decision of selecting a vendor for the respective service does not itself carry unreasonable burdens or penalties for foot faults. Absent such clarification, 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.

Background

Tax Executives Institute was established in 1944 to serve the professional needs of business tax professionals. Today, the Institute has 53 chapters in the United States, Canada, and Europe. Our more than 5,300 members are accountants, attorneys, and other business professionals who work for 2,800 of the leading companies in North America and Europe. As a professional organization, the Institute is firmly dedicated to the development and effective implementation of sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the cost and burden of administration and compliance to the benefit of taxpayers and government alike. The Institute is committed to maintaining a system that works--one that builds upon the principle of voluntary compliance and is consistent with sound tax policy, one that taxpayers can comply with, and one in which the IRS can effectively perform its functions without unduly burdening taxpayers. We also support efforts to ensure that companies fairly present their financial condition in financial statements and related documents filed with the SEC.

These goals can only be achieved through our members' adherence to the highest standards of professional competence and integrity. To ensure compliance with the law, TEI's Standards of Conduct exhort the members to "present the facts required in tax returns and all the facts pertinent to the resolution of questions at issue with representatives of the government imposing the tax." As important, the members "recognize an obligation to make an affirmative contribution to the sound administration of the laws, and to the adoption of sound legislation, by cooperation and consultation with the persons charged with those functions, having due regard for the interests of society, as well as the interests of the company and its employees." In short, TEI members agree that a balance must be struck between public duty and private right.

TEI members are responsible for conducting the tax affairs of their companies and ensuring their compliance with the tax laws. TEI members deal with the tax code in all its complexity, as well as with the Internal Revenue Service, on almost a daily basis. Most of the companies represented by our members are subjected to scrutiny by the U.S. Internal Revenue Service and by various other agencies in the United States and foreign jurisdictions on a continual basis.

As a professional association of in-house tax executives, TEI offers a different perspective on these issues from other organizations. The Institute does not represent the professional advisors (be they attorneys or accountants) who render these tax services. Rather, TEI's members work directly for the corporations that routinely enter into business transactions that require an analysis of their tax benefits and burdens. These companies have professional staffs dedicated to ensuring compliance with the law while minimizing their tax liability. To accomplish this objective, TEI members engage the services of professional tax advisers, including those rendered by their companies' independent auditors. We, along with the government and the investing public, have the most at stake in trying to craft a financial reporting system that fairly presents the results of operations and is as administrable and efficient as possible.

Some of the controversy surrounding the adoption of the Act, as well as the Proposed Rules, relates to the potential effects of the legislation's auditor independence rules upon audit firms and other professional firms rendering professional tax services in conjunction with or ancillary to audit services to registrants. TEI members are the consumers of such services, and their interests involve not only the concerns to which the Proposed Rules are directly aimed, but also the ability to obtain various necessary tax services of the highest quality in an efficient and cost-effective manner. These services (3) are not generic but in fact vary widely in their character--their fundamental nature, their relationship to the tax provision that is part of the financial statements, their relationship to U.S. federal law, and even whether they are related to levies or impositions of the United States, or to its political subdivisions, or to a foreign government.

Structure of the Proposed Rules

Section 201 of the Act provides in pertinent part:

(a) PROHIBITED ACTIVITIES. Section 10A of the Securities Exchange Act of 1934 (15 U.S.C. 78j-1) is amended by adding at the end the following:

"(g) PROHIBITED ACTIVITIES--Except as provided in subsection (h), it shall be unlawful for a registered public accounting firm (and any associated person of that firm, to the extent determined appropriate by the Commission) that performs for any issuer any audit required by this title or the rules of the Commission under this title or, beginning 180 days after the date of commencement of the operations of the Public Company Accounting Oversight Board established under section 101 of the Sarbanes-Oxley Act of 2002 (in this section referred to as the `Board'), the rules of the Board, to provide to that issuer, contemporaneously with the audit, any non-audit service, including--

"(1) bookkeeping or other services related to the accounting records or financial statements of the audit client;

"(2) financial information systems design and implementation;

"(3) appraisal or valuation services, fairness opinions, or contribution-in-kind reports;

"(4) actuarial...