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PCAOB Adopts Rules on Auditor Independence and Tax Services
On July 26, the Public Company Accounting Oversight Board unanimously adopted certain ethics and independence rules addressing tax services, contingent fees, and certain related general ethics and independence standards as they apply to the auditors of public companies. The PCAOB also adopted an auditing standard on reporting on whether a previously reported material weakness continues to exist. This standard, PCAOB Auditing Standard No. 4, establishes requirements and provides direction that applies when an auditor is engaged to report on whether a previously reported material weakness in internal control over financial reporting continues to exist as of a date specified by management.
The ethics and independence rules fall into three areas. First, the rules identify three circumstances in which the provision of tax services impairs an auditor's independence.
- Rule 3521 treats registered public accounting firms as not independent of their audit clients if they enter into contingent fee arrangements with those clients.
- Rule 3522(a) treats a registered public accounting firm as not independent from an audit client if the firm provides services related to marketing, planning, or opining in favor of the tax treatment of a transaction that is a confidential transaction as defined in Rule 3501. In addition, Rule 3522(b) would treat a registered public accounting firm as not independent if the firm provides services related to marketing, planning, or opining in favor of a tax treatment on a transaction that is based on an aggressive interpretation of applicable tax laws and regulations. Rule 3522(b)'s scope would also include listed transactions as defined by Treasury Department regulations.
- Rule 3523 will treat a registered public accounting firm as not independent if the firm provides tax services to certain members of management who serve in financial reporting oversight roles at an audit client or to immediate family members of such persons.
Second, the rules strengthen the auditor's responsibilities in connection with seeking audit committee pre-approval of tax services. Specifically, Rule 3524 would require a registered public accounting firm that seeks such pre-approval to describe proposed tax services 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.
Third, the rules lay a foundation for the PCAOB's independence rules. Specifically, 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 person knew, or was reckless in not knowing, would directly and substantially contribute to such violation. Rule 3520 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 rules and standard will not take effect unless approved by the Securities and Exchange Commission pursuant to Section 107(b) of the Sarbanes-Oxley Act.
PCAOB Adopts Rules on Auditor Independence and Tax Services
On July 26, the Public Company Accounting Oversight Board unanimously adopted certain ethics and independence rules addressing tax services, contingent fees, and certain related general ethics and independence standards as they apply to the auditors of public companies. The PCAOB also adopted an auditing standard on reporting on whether a previously reported material weakness continues to exist. This standard, PCAOB Auditing Standard No. 4, establishes requirements and provides direction that applies when an auditor is engaged to report on whether a previously reported material weakness in internal control over financial reporting continues to exist as of a date specified by management.
The ethics and independence rules fall into three areas. First, the rules identify three circumstances in which the provision of tax services impairs an auditor's independence.
- Rule 3521 treats registered public accounting firms as not independent of their audit clients if they enter into contingent fee arrangements with those clients.
- Rule 3522(a) treats a registered public accounting firm as not independent from an audit client if the firm provides services related to marketing, planning, or opining in favor of the tax treatment of a transaction that is a confidential transaction as defined in Rule 3501. In addition, Rule 3522(b) would treat a registered public accounting firm as not independent if the firm provides services related to marketing, planning, or opining in favor of a tax treatment on a transaction that is based on an aggressive interpretation of applicable tax laws and regulations. Rule 3522(b)'s scope would also include listed transactions as defined by Treasury Department regulations.
- Rule 3523 will treat a registered public accounting firm as not independent if the firm provides tax services to certain members of management who serve in financial reporting oversight roles at an audit client or to immediate family members of such persons.
Second, the rules strengthen the auditor's responsibilities in connection with seeking audit committee pre-approval of tax services. Specifically, Rule 3524 would require a registered public accounting firm that seeks such pre-approval to describe proposed tax services 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.
Third, the rules lay a foundation for the PCAOB's independence rules. Specifically, 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 person knew, or was reckless in not knowing, would directly and substantially contribute to such violation. Rule 3520 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 rules and standard will not take effect unless approved by the Securities and Exchange Commission pursuant to Section 107(b) of the Sarbanes-Oxley Act.
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