The Sarbanes-Oxley Act of 2002 (SOX) prohibits auditors from performing the following nonaudit services for their public company audit clients.
* Bookkeeping or other services related to the accounting records or financial statements of the audit client
* Financial information systems design and implementation
* Appraisal or valuation services, fairness opinions or contribution-in-kind reports
* Actuarial services
* Internal audit services
* Management functions or human resources services
* Broker or dealer, investment adviser or investment banking services
* Legal services and expert services unrelated to the audit
In addition, the Public Company Accounting Oversight Board (PCAOB) has the authority to prohibit additional services, such as tax services, if it finds that such prohibitions are in the public interest.
An area of uncertainty exists regarding how to resolve the potential nonaudit/tax services overlap. Some tax-related nonaudit services that are compliance, planning or advisory in nature might arguably be included in one of the prohibited nonaudit services.
Although SOX places no specific restrictions on the performance of tax services for public company audit clients, the following nonaudit services that CPAs customarily provide in their tax practices should be acceptable under the rules.
* Payroll, sales, property, state income, federal income and other tax compliance services
* Traditional tax planning services
* Analysis of client records to determine strategies for minimizing state and local income, sales, property and payroll taxes
* Appraisal services for tax compliance purposes, such as assigning values to intangible assets under IRC Section 197
* Loaning tax staff to an audit client for special projects
* Representing the audit client in IRS and state and local government audits
* Designing or commenting on the tax aspects of a compensation package for management staff of the audit client
Tax services for public company audit clients account for 30 percent to 35 percent of the revenue of large accounting firms. The PCAOB has already indicated that it will not prohibit tax services, despite the fact that many critics of the industry would like to see a ban on all tax services. However, PCAOB officials have at times said negative things about large firms providing aggressive tax shelter consulting for their audit clients. Investors will have to judge for themselves whether tax services impair the independence of the auditors of specific companies.
To enhance audit committee oversight and to ensure that audit committees are cognizant of all services provided by independent auditors and have considered the effect of those services on financial statement audits, SOX requires the audit committee to pre-approve each new nonaudit service provided by the auditors. One effect of this provision is a lessening of the number of nonaudit services provided by company auditors.
In addition, SOX requires disclosure of nonaudit services that are approved by audit committees. The services that are currently being approved are mostly tax services, which are one of the few nonaudit services not prohibited by SOX. Investors who are concerned about the effect of nonaudit services on an auditor's independence and ability to be objective can find the nonaudit services performed by the auditor in the company's proxy statement (SEC Form DEF 14A).
The authors of SOX hope that these changes in the audit industry, plus other SOX changes that directly affect auditors, will result in enhanced independence of auditors, who will then render completely objective opinions on corporate financial statements and better quality audits as a result of auditors refocusing on their core business.
PCAOB has indicated that it will look to see whether large audit firms sufficiently reward technical expertise. Some fear that firms have moved away from emphasizing technical expertise when considering staff compensation and have instead emphasized selling skills.
MARTIN TANENBAUM (firstname.lastname@example.org) serves as tax principal at Tauber & Balser, an Atlanta-based CPA firm specializing in accounting and auditing, SEC reporting, forensic accounting, financial and tax consulting, mergers and acquisition assistance and estate tax planning. He specializes in corporate, personal and partnership income tax research and compliance with special expertise in the retail industry. Reach him at (404) 814-4920.