Academic journal article Journal of Accountancy

Tax Services after Sarbanes-Oxley: How to Cope in an Uncertain Present

Academic journal article Journal of Accountancy

Tax Services after Sarbanes-Oxley: How to Cope in an Uncertain Present

Article excerpt

In response to the public outcry for enhanced investor protection, Congress enacted the Sarbanes-Oxley Act of 2002. Among other things it created new penalty and enforcement powers for the SEC--which subsequently issued audit rules--expanded the accountability of CEOs and CFOs for financial statements and enhanced audit commmittee responsibilities. The act's primary focus, however, was on regulating auditors and audit firms serving public companies. It created the Public Company Accounting Oversight Board (PCAOB) and gave it responsibility to regulate accounting firms and set auditing standards. The act also mandated stricter audit engagement personnel rotation and changes to professional ethics standards to avoid actual and perceived conflicts of interest. In perhaps its most controversial section, the act included new independence rules that prohibit firms from providing audit clients with certain nonaudit services and required audit committee preapproval of all other such services.

The new SEC rules leave some tax practitioners wondering where they fit in. On its list of prohibited nonaudit services, the act did not include tax services but said firms could perform such services for audit clients with audit committee approval. This article discusses the impact on tax practice of the SEC rules to implement Sarbanes-Oxley. It covers the guidelines for nonaudit services, including some questions that remain unanswered. It also addresses nonservice issues (such as partner rotation) and concludes with some observations about the next steps CPA tax practitioners should consider taking.


While Sarbanes-Oxley and subsequent guidance apply only to CPAs auditing the financial statements of"issuers," many practitioners have very real concerns about the reaction of state legislative and regulatory bodies to the SEC rules implementing Sarbanes-Oxley. These rules have significantly affected the ability of CPAs to provide nonaudit services to audit and attest clients in public companies. The so-called cascade effect, in which state legislatures apply independence provisions similar to Sarbanes-Oxley to audits, reviews, compilations and related attest services for privately held companies, is a very real concern for the private sector and their CPAs.

The AICPA endorsed many of the corporate governance changes Sarbanes-Oxley mandated for public issuers. However, a number of these changes would be inappropriate and even counterproductive if imposed at the state level on all corporate entities--both public and private. Several state legislatures are considering bills that would extend provisions similar to Sarbanes-Oxley to CPAs auditing private companies. For the most recent status of this activity and how they might be part of the dialogue in their home states, CPAs should go to

In implementing the rules, public companies will incur substantial costs of separate corporate governance/monitoring systems (audit committees with independent members) as well as higher fees for acquiring nonaudit services from accounting firms other than their auditors. Many private clients say the cost of segregating advisers far outweighs any benefit from apparent enhanced corporate governance. These clients do not want to lose the valuable nonaudit services their independent CPAs regularly deliver using knowledge gained in the annual attestation engagement. Although many CPA firms are already adjusting to the need to segregate services to avoid violating GAO and SEC independence standards, it's clear all firms will be forced to change if states extend these rules to attest engagements for private companies,


With only a few exceptions, the rules do not specifically mention tax services in the list of prohibited nonaudit services (see "Prohibited Nonaudit Services," page 36). CPAs can do transfer pricing, cost segregation studies and tax-only valuations, as long as the results are not subject to audit procedures as part of the financial statement audit. …

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