In recent speeches, members of the SEC have suggested that some within the accounting industry may be returning to a pre-Sarbanes-Oxley practice of providing certain services to audit clients – an arrangement that would compromise auditor independence.
I recently chatted with Stanley Jozefiak, the practice director and general counsel of True Partners Consulting LLC, to get his thoughts on this this issue. Jozefiak, who has a strong point of view on this issue, warns that many companies may be courting “auditor independence” risks.
Eric Krell: What types of services have you seen that would put companies at the most risk?
Stanley Jozefiak: Tax consulting services. For the first few years after SOX, many companies stopped using their audit firms to provide tax consulting services. Today replica oakley sunglasses, most companies have returned to that practice. We have seen numerous situations in which the audit firm provides tax consulting services that result in a tax position that must be evaluated and reserved under ASC 740-10 “Accounting for Uncertainty in Income Taxes” (formerly known as FIN 48). In some cases, the audit firm assists in this evaluation. In all cases, the auditors must analyze these tax reserves. Eventually replica oakley sunglasses, the audit firm will find itself in a position of reviewing its own work and can be viewed as advocating their client’s interest. Consequently, the independence principle may be impaired.
New to this tax filing season is the introduction of “Schedule UTP,” which requires companies to disclose detailed information about their book reserves for uncertain tax positions with corporate tax returns. Many companies fear that disclosing this information may result in more of their tax positions being challenged by the IRS. On the other hand, failure to disclose may result in double penalties. The decision to reserve for a tax position that will result in a disclosure requires a complex analysis which is made more difficult when the person auditing it originally advocated the position and may face legal exposure if their advice is found to have been misguided.
If a position is successfully challenged by the IRS replica oakley sunglasses, one way to avoid penalties is to have a tax opinion from an independent tax advisor. Having an opinion from the same firm that audits the company and assisted in the transaction may not be sufficient to avoid such penalties due to the inherent conflict of interest. This has been a finding by the U.S. Tax Court in the recent Canal Corp. case.
Eric Krell: What are the prohibited services?
Stanley Jozefiak: The Sarbanes-Oxley Act lists nine activities that an auditor cannot perform for an audit client. If an activity is not listed, the auditor may provide the company with the service replica oakley sunglasses, as long as it is approved by the company’s audit committee. The rules currently lack clarity and appear ambiguous in many respects; hence they are often applied inconsistently. Accordingly, there are many instances in which an actual or a perceived conflict takes place. This conflict often arises in tax matters where the tax consultant must interpret law and advocate positions on behalf of the client on a regular basis. On the one hand, SOX allows auditors to provide tax services; on the other, auditors are prohibited from acting as advocates of their clients.
Eric Krell: Apart from independence risks, do any other risks arise?
Stanley Jozefiak: The audit committees experience a significant amount of risk when evaluating potential tax services to be provided by the audit firm because the current rules do not provide definitive guidance about where some tax services fit on the list of prohibited nonaudit services. The audit committees have the very difficult task of balancing efficiency and protecting the investors.
Additionally replica oakley sunglasses, even in an instance where a tax service is not specifically prohibited by the SEC, hiring an audit firm to perform such a service may create a perceived impairment of independence and result in a loss of public trust. The entire industry is at a risk of credibility loss if prudent judgment is not exercised. The potential lack of investor confidence could have a significant impact on the securities markets in the future.
Finally, many companies need to manage the diminishing pool of independent audit firms. Multinationals frequently are required to use several different audit firms around the world. Private companies who may want to go public do not want to be caught short when the time comes to hire a public accounting firm. Using an accounting firm to provide tax services when other alternatives are available can be viewed as a misuse of a dwindling resource when the need for an independent auditor arises in the future.
Eric Krell: How do you suggest that companies respond?
Stanley Jozefiak: Companies should evaluate the different types of tax services currently provided by their auditors, and they should adopt new policies regarding engaging an auditor for tax services. The growth of an alternative, independent tax consulting industry over the last few years now provides companies and their boards an easy way to obtain high-quality tax services while mitigating the risk inherent in using their auditors to provide tax advice or in unnecessarily limiting their choice of independent audit firms. Companies that are especially risk-averse should consider engaging only such independent firms to perform tax services. In addition, audit committees should consider seeking assurance from the SEC on questionable areas through no-action letters. ###
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