Magazine article The CPA Journal

PCAOB Rules on Independence and Personal Tax Services

Magazine article The CPA Journal

PCAOB Rules on Independence and Personal Tax Services

Article excerpt

Current Guidance for Public Company Auditors

In 2005, the Public Company Accounting Oversight Board (PCAOB) adopted Ethics and Independence Rules Concerning Independence, Tax Services and Contingent Fees (PCAOB Release 2005-014, July 26, 2005). This omnibus release, the PCAOB's first independence and ethics rulemaking document, addressed tax services, contingent fees, personal accountability for independence infractions, and certain general independence and ethics rules. The SEC approved the rules on April 19,2006, after a brief public comment period provided for under the framework created by the Sarbanes-Oxley Act (SOX).

The PCAOB rulemaking was prompted by concerns over two types of tax services: auditors' promotion of potentially abusive tax-shelter products to their public company audit clients, and their promotion of these and other tax services to public company executives. To help the PCAOB fully understand the various viewpoints and concerns regarding these and similar issues, prior to rulemaking the board held a public roundtable on the effect of tax services on auditor independence. Subsequently, it concluded that a broad ban on tax services was not necessary to safeguard independence. The board proposed (among other things) rules that restrict an auditor's involvement in certain aggressive tax-position transactions, rules that restrict tax services provided to a company's senior financial management, and new procedures for audit committee preapproval of tax services. The PCAOB received more than 800 comment letters from the investing, accounting, academic, and regulatory communities, which largely supported the proposed rules.

Rule 3523: Tax Services for Persons in Financial Reporting Oversight Roles

What is rule 3523? This mle states that if auditors or their affiliates provide tax services to public company managers in financial reporting oversight roles (FROR) during the audit and professional engagement period, their independence is impaired. The term "audit and professional engagement period," adopted in this rulemaking and based on the SEC's existing rules, has two components. The professional engagement period starts when an auditor is initially engaged to perform audit, review, or other attestation services (or begins performing any of these attest services, if earlier) and lasts until the auditor or client officially terminates the relationship by notifying the SEC. The audit period is the period covered by the financial statements or other information under audit.

The rule generally prohibits an auditor from providing tax services to persons in FRORs during this period, to eliminate any perception that the auditor and the client's senior financial management share a joint interest, which may diminish, or appear to diminish, the auditor's ability to conduct an unbiased audit.

What is a financial reporting oversight role (FROR)? FROR is not a new term; it comes from the SEC independence rules and is, simply, a position in which an individual influences a company's financial reporting. An individual in an FROR influences the contents of a company's financial statements and related information filed with the SEC, either directly or by overseeing persons responsible for preparing the information. Examples of FRORs include the executives who oversee the preparation of the financial statements and those who are responsible for designing and maintaining the company's system of internal controls.

How can FRORs be identified? While auditors likely will be well acquainted with the key financial players in a company, it is imperative that they-ideally, with the client's help-evaluate and identify all possible FROR candidates. This is particularly important for large multinational companies that have numerous affiliates. Otherwise, both the auditor and the client risk violating the rule.

When assessing FRORs, it is very important to look beyond an employee's title and evaluate the substance of the person's roles and responsibilities and the organization's financial reporting hierarchy. …

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