SEC Approves New Auditor Rules

The SEC approves new PCAOB rules on auditor independence.

The Securities and Exchange Commission has approved Public Company Accounting Oversight Board rules on independence, tax services, and contingent fees, some of which became effective on April 29.

The rules require accounting firms and anyone connected with the firm’s employees to be independent of the firm’s audit clients. For example, a firm would fail the independence test if it provided tax services to certain managers in financial-oversight roles or to their immediate family members.

Auditors are not independent if they provide tax services or opinions related to marketing, planning, or transactions based on aggressive interpretations of applicable tax laws and regulations, among other things.

The rules also increase the responsibility of auditors to seek audit-committee preapproval of tax services, a requirement of the Sarbanes-Oxley Act. The accounting firm must seek such preapproval in writing, discuss the potential effects of the services on the firm’s independence, and keep a record of the discussion.

These rules, as ethics rules, also mean that individuals can be held personally responsible when their actions contribute to their firm’s violation of relevant laws, rules, or professional standards.

The three rules that become effective on April 29 are rule 3501 (Definition of Terms), rule 3502 (Responsibility Not to Knowingly or Recklessly Contribute to Violations), and rule 3520 (Auditor Independence).

Rule 3521 on contingent fees and rule 3522 on tax transactions become effective on June 18, and rule 3523 (Tax Services for Persons in Financial Reporting Oversight Roles) becomes effective on October 31. Finally, rule 3524 (Audit Committee Pre-approval of Certain Tax Services) will not apply to any tax service preapproved on an engagement-by-engagement basis before June 18. The rule will also not apply to tax services provided to audit clients whose audit committees preapprove tax services for work begun by April 20, 2007.

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