A Carnaby Street for Taxes

New auditor conflict-of-interest rules send corporate clients scattering from the Big Four in search of smaller tax specialists.

It wasn’t by choice. Nevertheless, tax director Laurie Beaudet erased her auditor, PricewaterhouseCoopers, from a list of possible vendors for a tax project she planned to outsource. “It’s not the end of the world, but we did have to change our thinking about who to put out bids to,” recalls Beaudet, director of tax for metals processor and distributor Ryerson Inc.

Last year, Beaudet decided to outsource a FAS 109 (Accounting for Income Taxes) project to an outside firm, mainly because of a staffing-related issue. Although her six-person staff (including three tax managers) had the expertise, they didn’t have the time to focus on the matter; it would take a senior tax manager two to three months to complete, she estimated.

Usually, Beaudet would have included PwC on her request-for-proposal list because of the firm’s expertise and insider-like knowledge of Ryerson and the metals industry. But final auditor-independence rules issued by the Public Company Accounting Oversight Board (PCAOB) and awaiting approval by the Securities and Exchange Commission, will likely ban auditors from performing certain tax work for their clients. Beaudet thus wants to fill her list for such projects with other firms.

Because PwC’s scope of work for Ryerson was limited by the new rules, Beaudet “was forced to build a new network” of specialists that could take on tax tasks that were either too time-consuming for the in-house staff or that required specialized knowledge that the staff didn’t have.

The limits put on PwC and other audit firms stem from Section 103 of the Sarbanes-Oxley Act, which directs the PCAOB to forge auditor-independence rules for registered public accounting firms. Those rules, which have been newly issued by the board, essentially fortify independence strictures for auditors and expand existing SEC rules, notes George Victor, the partner in charge of quality control at the Holtz Rubenstein Reminick LLP accounting firm.

He explains that four of the PCAOB’s auditor-independence rules relate specifically to tax services:

• Rule 3524, which mandates audit committee pre-approval before an auditor works on certain non-audit jobs. Those jobs include tax services that aren’t prohibited outright under Sarbox’s scope-of-service provision, Section 201.

• Rule 3521, which bans auditors from providing tax-planning services — including the development of tax shelters — on a contingent-fee or commission basis. The thinking is that a conflict of interest can arise if auditors’ fees are based on a percentage of tax savings.

• Rule 3522, which bars auditors from providing services related to “aggressive tax transactions.” Those are defined as schemes that are “more likely than not” to be disallowed by the Internal Revenue Service because their only purpose is tax avoidance.

• Rule 3523, which forbids audit firms from providing tax services to CFOs, CEOs, or other client-company officers who have roles in financial-reporting oversight.

Further, Sarbox 201 speaks directly to audit firms, banning them from engaging in, among other non-audit services, bookkeeping for audit clients. Generally, the section bars a company’s auditors from performing any tax accounting work done under FAS 109 (the standard covering income tax accounting).


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