Concerns Mount Over Proposed Curbs on Tax Services

Concerns are mounting among both accounting firms and consumer groups over the rules proposed by the Securities and Exchange Commission to limit the tax services provided by auditors.

SEC's proposed rules represent a cautious compromise, saying auditors can still provide tax services so long as the services are pre-approved by audit committees and don't involve the firm acting as an advocate for the client or auditing its own work. Apparently, this is a compromise that no one likes. Examples of conflicting views:

  • Ernst & Young observed that the SEC has not been clear enough about whether it will allow certain types of tax services, with the result that some companies have been advised by lawyers not to use their audit firms for any work that involves strategies to minimize tax obligations, "which is, of course, a basic purpose of most tax planning and tax advisory services."

  • Barbara Roper, director of investor protection at the Consumer Federation of America, is concerned that exceptions may be made for small audit firms. She wrote, "We are particularly disturbed that the release repeatedly seeks comments on the need for special treatment for small companies and small audit firms and broad exemptions for foreign issuers [companies] -- changes that were actively pushed, but unequivocally rejected during the legislative process."

  • PricewaterhouseCoopers has urged the SEC to differentiate between services in which the audit firm represents a client in a public forum, such as an IRS proceeding or SEC inquiry, versus representing a client in private. It says the ban on advocacy "should not apply to non-public forums where there is no appearance issue. The Commission should clarify that 'acting as an advocate' involves advancing the client's cause in a public forum."

  • Lynn Turner, former chief accountant at the SEC is concerned about the exception made for services pre-approved by audit committees. He worries the rules proposed by the SEC could allow audit committees to set general policies for executives to follow when using their audit firms for tax advice and other services, rather than forcing them to examine each service on its individual merits.

  • KPMG is concerned that curbs on tax services will lower the quality of audits. In its January 9th letter to the SEC, KPMG wrote, "The broader understanding of a company's tax posture that is gained through the provision of tax planning services leads to a better audit, including evaluating the client's tax exposure."

  • A commission on public trust convened by the Conference Board, is concerned the SEC has not been specific enough in barring certain types of tax services. It issued a statement saying, auditors should avoid "novel and debatable tax strategies and products that involve income tax shelters and extensive off-shore partnerships and affiliates."

  • The AICPA is concerned because it says the IRS, Congress and the Treasury Department have had a hard time defining what constitutes a "tax shelter." It has urged the SEC to "specifically recognize that tax minimization services are appropriate, while precluding auditors from advising audit clients on tax transactions for which there is no business purpose other than tax avoidance, except those that are consistent with the intent of applicable tax laws."

The SEC is expected to finalize the rules on January 22, 2003.