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PCAOB Will Seek Comments on Auditor Communications, Tax Services

The Public Company Accounting Oversight Board will seek comments on a proposed rule that will require all registered public accounting firms to communicate to issuers' audit committees any relationships that may bear on the firms' independence. Firms would be required to communicate the information prior to accepting a new audit engagement and then annually for continuing engagements. The board also will seek comments on an amendment to Rule 3523 regarding the provision of tax services to persons who hold financial reporting oversight roles. Under the proposal, auditors would be permitted to provide tax services to a person in a financial reporting oversight role prior to the beginning of the professional engagement period without impairing their independence. The board will not apply Rule 3523 to tax services provided on or before April 30, 2008, to provide sufficient time to consider the comments on the proposed amendment.

The proposed amendment to Rule 3523 is the result of comments received in response to the board's concept release which revisited the application of the board's rules to tax services provided during an audit period. The PCAOB received 13 comments, most of which favored allowing the provision of tax services during the audit period that precedes the professional engagement period. Board member Kayla Gillan noted that most of the comments in support of permitting the tax services prior to the audit engagement had a self-interest in the issue. She said she hoped for more diversity in the next round of comments. Registered firms must still consider the facts and circumstances surrounding the provision of those services and any impact they may have on independence.

The proposed amendment would also apply to registered firms that have provided tax services to management prior to the filing of an initial public offering. The firm that provided the tax services could still become the auditor of record for the IPO even if it performed tax services for individual managers prior to the filing of the IPO.

Proposed Rule 3526 on communications with audit committees about independence would supersede the current interim standard and two related interpretations. Auditors would be required to describe in writing all of the relationships between the auditor and its related entities and the company and its related entities that may reasonably be considered to bear on independence. PCAOB Chairman Mark Olson said the proposal would help audit committees make more informed decisions when hiring their auditors.

Board member Daniel Goelzer noted that, surprisingly, the interim rules do not require that the audit firm communicate about any relationships that might bear on independence prior to being hired to conduct the audit. Proposed Rule 3526 will address that anomaly by requiring the would-be auditor to inform the audit committee of any present or past relationships with the client or its financial reporting executives, he explained. Mr. Goelzer said it is a common sense requirement to have the relevant information presented to the audit committee when it selects the auditor, not after the decision has been made and the work has been performed.

Board member Charles Neimeier noted that, as the list of possible independence impairments has grown, it has become more difficult for issuers to find auditors without any conflicts. He does not favor individualized exemptions because they lack transparency. Mr. Neimeier said the provision of tax services to managers who are involved in financial reporting during the audit presents significant independence concerns, but he is not convinced that those concerns extend to the period prior to the commencement of the professional audit engagement.

Mr. Neimeier noted that a number of commenters on the concept release asked for a transition period on the provision of personal tax services for the first 180 days of the audit engagement. He said he believes that transition period is too long, but will consider any additional comments on this point. Mr. Neimeier suggested that any comments supporting such a lengthy transition period should include some analysis on why it would not have a detrimental effect on auditor independence.

The comment period on both proposals will remain open for 45 days.