(The article featured below is a selection from PCAOB Reporter, which is available to subscribers of that publication.)

PCAOB Adopts Ethics and Independence Rule

The PCAOB has approved a new ethics and independence rule relating to communications between auditors and audit committees, and amended the rule governing the provision of tax services to persons in financial reporting oversight roles. The Board also voted to adopt a revised implementation schedule for rule 3523 so that it will not apply to tax services provided on or before December 31, 2008 as long as the services are completed before the audit firm's professional engagement period begins. Chief Auditor Tom Ray noted that the amendment will reduce the likelihood that a company's choice of auditor will be unnecessarily restricted.

The PCAOB's new ethics and independence rule supersedes the interim rule, Independence Standards Board Standard No. 1, relating to discussions with audit committees. Rule 3526 requires an audit firm to disclose to the audit committee all relationships between the auditor and its related entities, and the company and its related entities, which may affect its independence. The communications must take place before a firm becomes an issuer's auditor of record, and annually thereafter. If approved by the SEC, rule 3526 will become effective on the later of September 30, 2008 or 30 days after the SEC's approval.

Some of the commenters urged the PCAOB to insert language to consider it reasonable for the audit committee to rely on the audit firm's judgment with respect to independence. Associate Chief Auditor Bella Rivshin said the staff concluded that it was not necessary to add a reference to judgment since it must always be exercised.

The staff also concluded that the initial communication with the audit committee should not be limited to the period before the audit engagement. The nature of the relationship must be considered. For example, Rivshin noted that the firm may have designed the company's financial reporting system. However, one modification to the proposal makes clear that the relationships that are required to be disclosed must bear on the auditor's independence as of the date of the communication.

Secondary auditors are not required to comply with rule 3526. The primary auditor must disclose any relationships with the secondary auditors that may bear on their independence.

PCAOB member Daniel Goelzer referred to the "long and winding road" since the December 2004 proposal to prohibit auditors from providing personal tax services to senior officers who oversee financial reporting at a public company audit client. The general idea remains sound, he said, but the amendment solves the problem of denying an audit engagement to a firm that provided personal tax services even if they ended before the firm became the financial statement auditor.

Goelzer noted that some of the commenters raised concerns about potential legal obstacles to the auditor's disclosure of personal tax work for financial reporting executives. Gordon Seymour, the Board's general counsel, said that disclosure of the name is prohibited without the taxpayer's permission. He added that the Internal Revenue Service has detailed guidance with respect to consent.

PCAOB Chairman Mark Olson noted that, under rule 3523, audit firms would continue to be unable to provide tax services to persons covered by the rule once the professional engagement period has commenced. Even if a particular tax engagement is not prohibited by the rule, Olson said the auditor would still have to consider the relevant facts and circumstances to determine whether it would impair independence under the SEC's standard. The amendment to rule 3523 will become effective immediately upon approval by the SEC.