New SEC Audit Rules Don't Ban Tax Work

by Mike Godfrey, Tax-News.com, New York

23 January 2003

The US Securities and Exchange Commission yesterday approved a new set of rules covering audit work by accounting firms which are intended to increase the independence of auditors. Some observers say that pressure from the accountancy profession has drawn the sting of the new rules, while others say they will result in the loss of non-audit work to non-audit competitors or law firms.

Wording in the rules which would have prevented auditors from offering many types of tax work has been softened: tax planning services and tax advice are acceptable, but designing or recommending tax shelters for audit clients could raise problems, says the SEC.

Top accounting firms are said to derive 25% or more of their income from tax-related services, and are desperate to hang on to it given that they are now prevented from offering many other types of work to their audit clients, including bookkeeping, appraisals, brokerage, investment banking, actuarial services, legal advice, management, and the design of financial information systems used in an audit.

The rules call for regular rotation of top audit partners, and require a one-year "cooling off" period if a client hires a member of the audit team for a top management position. Audit committees of corporate boards will have to review the company's accounting and pre-approve all audit and non-audit services provided by the company's outside auditor. Small accounting firms with fewer than 10 partners and five SEC clients will be exempt from the new rules.

The SEC has also modified rules which require public companies to disclose how much they pay auditors each year for audit and non-audit services, changing the definitions of audit and no-audit work in such a way that more work will be classified as audit - to the advantage of accounting firms which will no longer appear to be providing services which heavily outweigh audit work. In future, companies must report the fees they pay to accountants divided into audit fees, audit-related fees, fees for tax services, and all other fees.

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