SEC Approves 7 PCAOB Rules for Auditors

The Securities and Exchange Commission (SEC) has approved Public Company Accounting Oversight Board (PCAOB) ethics and independence rules concerning independence, tax services, and contingent fees, according to a statement issued Friday by the PCAOB. The ethics rules also codifies the principle that persons associated with registered public accounting firms, such as individual accountants, can be held responsible when certain of their actions contribute to a firm’s violation of relevant laws, rules or professional standards.


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The rules establish a general obligation requiring registered public accounting firms and persons associated with them, to be independent of the firm’s audit clients throughout the audit and professional engagement period, creating a foundation for the Board’s ethics rules. According to the newly approved rules, a registered accounting firm is NOT independent of a client they have contingent fee arrangements with or to which they provide tax services to members of management serving in financial oversight roles or their immediate family members.

The provision of tax services which impair an auditor’s independence under the new rules include services related to marketing, planning, or opining in favor of the tax treatment of, among other things, transactions that are based on aggressive interpretations of applicable tax laws and regulations.

Further implementing the requirement of Sarbanes-Oxley Act that auditors’ non-audit services be pre-approved by the audit committee, the rules strengthen the auditor’s responsibilities in connection with seeking audit committee pre-approval of tax services. Specifically, the rules require a registered public accounting firm that seeks such pre-approval to describe proposed tax service engagements, in writing, for the audit committee; to discuss with the audit committee the potential effects of the services on the firm’s independence; and to document the substance of that discussion.

Three of the rules, 3501 – Definition of Terms, 3502 – Responsibility Not to Knowingly or Recklessly Contribute to Violations, and 3520 – Auditor Independence, go into effect beginning Saturday, April 29, 2006. Effective dates for other rules include:

  • Rule 3521 – Contingent Fees This rule will not apply to contingent fee arrangements that were paid in their entirety, converted to fixed fee arrangements, or otherwise unwound before June 18, 2006.
  • Rule 3522 – Tax Transactions This rule will not apply to tax services that were complemented by a registered public accounting firm no later than June 18, 2006.
  • Rule 3523 – Tax Services for Persons in Financial Reporting Oversight Roles This rule will not apply to tax services being provided pursuant to an engagement in process on April 19, 2006, provided that such services are completed on or before October 31, 2006.
  • Rule 3524 – Audit Committee Pre-approval of Certain Tax Services This rule will not apply to any tax service pre-approved on an engagement-by-engagement basis before June 18, 2006. With respect to tax services provided to audit clients whose audit committees pre-approves tax services pursuant to policies and procedures, Rule 3524 will not apply to any such tax service that is begun by April 20, 2007.

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