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Abstract
Implications of the Sarbanes-Oxley Act of 2002 for the rendering of tax services by registered public accounting firms are discussed. Certain tax services performed for an audit client that might impair the independence of the audit firm are investigated. Disclosure requirements for tax service fees are presented. Also presented are potential conflict of interest situations for tax partners. In addition, international implications for tax and legal services are described.
Keywords: Tax services, Independence impairment, Conflict of interest
1. Introduction
One of the results of the Enron Corporation scandal is the enactment of the Sarbanes-Oxley Act of 2002. This act not only affects the auditors but also has implications for the tax departments of CPA firms. Tax topics are mentioned in the Sarbanes-Oxley Act only twice. The least controversial tax requirement is that the chief executive officer has to sign the corporation's tax return verifying the accuracy of the information on the return (Sarbanes-Oxley Act, Sec. 1001).
When discussing prohibited activities of an audit firm, tax services are not listed. In fact, the Sarbanes-Oxley Act, sec. 201(h) provides that a registered public accounting firm (i.e., audit firm) may perform tax services if there is an advance approval by the audit committee of the corporation. As required in Sec. 208(a) of the Sarbanes-Oxley Act, the Securities and Exchange Commission (Commission) has issued a regulation (Final Rule: Strengthening the Commission's Requirements Regarding Auditor Independence) related to non-audit services including tax services (effective May 6, 2003). This regulation discusses situations in which non-audit services that are performed for an audit client could jeopardize the independence of the accounting firm. The tax implications of this regulation will be examined next.
2. Tax Services
The Commission has discussed in this regulation that tax services involve consistent application of detailed tax laws. The SEC also recognizes that the Internal Revenue Service has the discretion to audit the tax service work. There has been a long-standing position by the Commission that accounting firms can provide tax services to audit clients without impairing the accounting firm's independence. The regulation permits the audit firm to provide tax services that are pre-approved by the audit committee (as required in Sec. 202 of the Sarbanes-Oxley Act) such as tax compliance, tax planning, and tax advice...