Industry Concerned as PCAOB Adopts Ethics/Independence Rules
The rules adopted Tuesday identify three circumstances when providing tax services impairs an auditor’s independence. Registered accounting firms are treated as not independent from an audit client if they:
- Enter into contingent fee arrangements with the client (Rule 3521)
- Provide services related to marketing, planning or opining in favor of the tax treatment of a transaction defined as a confidential transaction in Rule 3501 or based on an aggressive interpretation of applicable tax laws and regulations, including listed transactions as defined by U.S. Treasury Department regulations (Rule 3522(b))
- Provide tax services to certain members of management serving in financial reporting oversight roles at an audit client or to their immediate family members (Rule 3523).
In addition, the rules strengthen the requirement of auditor’s to seek audit committee pre-approval of tax services. Specifically, Rule 3524 requires registered public accounting firms seeking such pre-approval to describe, in writing, proposed tax services engagements for the audit committee, and discuss with the audit committee, the potential effects of the services on the firm’s independence and document the substance of that discussion.
Finally, newly adopted Rule 3502 codifies in an ethics rule the principle that persons associated with a registered public accounting firm should not cause the firm to violate relevant laws, rules, and professional standards due to an act or omission that the individual knew, or was reckless in not knowing, would directly and substantially contribute to such violation. Rule 3502 includes a general obligation requiring a registered public accounting firm and its associated persons to be independent of the firm’s audit clients throughout the audit and professional engagement period.
The adoption of Rule 3502 that has raised concerns among U.S. accounting firms about whether the PCAOB has overstepped remit because under the Rule, accountants could potentially be sanctioned if their actions or lack of action leads to a future regulatory violation by the firm. Comments submitted prior to adoption reveal that the industry is concerned with the potential consequences of such a rule on individual accountants and whether it can be practically enforced, according to The Accountant. Several, but not all, comments focused on the language used in the Rule.
“The AICPA [American Institute of Certified Public Accountants] respectfully submits that the [Sarbanes-Oxley] Act does not permit the PCAOB to expand the scope of an associated person’s liability through such a general rule…. Accordingly, Proposed Rule 3502 appears to be an overly expansive applications of the PCAOB’s rulemaking authority,” The Accountant reports the AICPA comments as saying.
The rules and standard will only take affect if approved by the Securities and Exchange Commission (SEC) pursuant to Section 107(b) of the Sarbanes-Oxley Act.