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PCAOB Proposes Consistency Standard and Issues Concept Release on Tax Services

The PCAOB members unanimously approved the issuance for comment of a proposed standard on evaluating the consistency of financial statements and a concept release on the provision of tax services for those in a financial reporting oversight role. The proposed standard would require auditors to make clear whether a firm has changed its accounting principles or corrected misstatements from previous filings. The PCAOB has proposed a delay in the application of rule 3523 for tax services provided on or before July 31, 2007 as long as the services are completed before a professional engagement period begins.

The Board has proposed to remove the hierarchy of generally accepted accounting principles from its interim standards. FASB has proposed to include the hierarchy in its accounting standards, which the Board believes is more appropriate. FASB has also revised the accounting requirements for changes in accounting principles and error corrections. The PCAOB's proposed standard on evaluating the consistency of financial statements will enhance the auditor's report by more clearly distinguishing between changes in accounting principles and corrections of material misstatements. PCAOB Chair Mark Olson encouraged the staff to coordinate these changes with the FASB if the Board adopts the proposal.

Board member Charles Niemeier noted that some of the members of the Standing Advisory Group had pointed out that changes to previously issued financial statements can cause confusion, especially if the changes are not adequately explained. The SAG participants said that corrections of errors should not be disguised as changes in accounting principles or as reclassifications. The SAG participants said the goal should be for auditors to evaluate the accuracy of a company's disclosure about changes to the financial statements rather than provide detailed explanations about the reasons for the change.

Registered firms have been required to comply with rule 3523 since November 1, 2006 as it relates to tax services provided to a person affiliated with the audit client. Board member Daniel Goelzer noted that the concept release focuses on a very narrow issue relating to tax services provided during the audit period. It does not reopen the question of whether auditors may simultaneously audit a company's financial statements and provide personal tax services to the executives who are responsible for the company's financial reporting, he said.

The PCAOB will solicit views on whether an accounting firm that has assisted company executives with their taxes should be able to accept an assignment as the company's audit later in the same year, Goelzer explained. The firm would have to end its tax work for the executives before it is engaged as the company's auditor. The current rule draws a bright line that is easy to understand, according to Goelzer, but it may make it harder for companies to switch auditors.

Board member Kayla Gillan said she was reluctant to agree to the further extension of time to comply with that aspect of rule 3523 and would not agree to a further delay beyond the July 31, 2007 extension. Niemeier said it is important to ensure that the Board's rules are no broader than necessary. As the list of independence impairments has grown, so have the difficulties in finding an auditor without conflicts, he said.

Jacquelyn Lumb