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Several provisions to the Sarbanes-Oxley Act will make it difficult for accountants to continue performing some tax services. This is the first of a two-part article.
On February 6,2003, the Securities and Exchange Commission (SEC) issued final regulations interpreting those provisions of the Sarbanes-Oxley Act of 2002 that relate to the services performed by CPA firms for their SEC-registered audit clients. To the relief of many, the regulations do not specifically prohibit the performance of most tax services. A number of provisions, however, will make it difficult to continue performing some tax services. In this article, the new regulations and their impact on accounting firms, on management, and on corporate audit committees will be examined. The limitations on the scope of services and on audit partner compensation, and the requirement that audit committees preapprove all tax services will be analyzed.
To perform an audit, an accountant must be independent. For auditors of SEC-registered companies, the federal regulations include detailed rules governing the determination of auditor independence.1 Severe sanctions can be levied against auditors found to lack independence. An audit client can suffer as well. For example, where an auditor is found to lack independence a re-audit may be ordered.
This article, which is in two parts, covers three sections of the new auditor independence rules that have an impact on tax services. These are: Scope of services limitations, audit committee approvals of non-audit services, and limitations on audit partner compensation.
Scope-of-services limitations: The new regulations prohibit accounting firms from performing nine non-audit services. A number of these services are often performed in conjunction with tax services. By prohibiting these services, the regulations prohibit part of tax services engagements. For accounting firms, this means loss of important work. For management, this means that, where outside auditors are used for tax work, a portion of a tax project may need to be performed by a firm unrelated to the outside auditors.
Audit committee approvals of non-audit services: Under Sarbanes-Oxley and the new SEC regulations, corporate audit committees of SEC-registered companies must pre-approve audit and non-audit services, including tax services, when the services are provided by outside auditors. For the auditors, this means that not only must they pitch tax services to management, they must obtain...