US Corporate Fraud Act May Reduce Tax Efficiency

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

05 August 2002

Tax practitioners in accounting firms on both sides of the Atlantic are worrying that the corporate fraud bill signed into law by President Bush last week may mean that the giving of tax advice will have to be separated from the audit function, with bad consequences both for their own businesses and for the tax-efficiency of audit clients.

The Sarbanes-Oxley bill itself doesn't list tax advice among the eight activities it insists must be separated from the audit function, but the extra responsibilities the new law places on audit committees, chief executives and auditors may lead some companies to create a clear separation between tax planning and the audit process.

The bill creates an independent auditing-oversight board under the Securities and Exchange Commission (which incidentally appears to have the right to finance itself with what amounts to a tax on public companies), insists that businesses must have audit committees with independent members which hire and supervise auditors, requires chief executives to certify accounts, and creates new and simpler routes for shareholders to bring actions against companies, their officers or their auditors.

The bill applies most of its measures to US-listed foreign companies and their advisers and auditors, as well as to US companies, which has drawn accusations of 'economic imperialism' from the EU and foreign governments, but in its present mood the US Congress wasn't likely to worry about such niceties.

As anyone knows who has been involved in the process of auditing a complex business operating in different countries, to separate tax planning from the accounting process is simply impossible without doing serious damage to tax efficiency. The later stages of the audit process require an intricate dance between tax and book-keeping which is constantly in danger of crossing the line into illegality, and compliance is a major preoccupation of cfo's and their advisers. Now that the playing field has been tilted substantially in the direction of greater responsibility and harsher punishments, many audit committees may feel the the game of tax avoidance is no longer worth the candle to anything like the same extent - and separating tax planning from audit is an obvious step for a cautious committee.

Whether the new law is in shareholders' best interests is a question. It may prevent executives from screwing them quite so readily, but if it drives foreign companies away from US stock exchanges, increases audit and advisory costs (by 20% it is estimated) and reduces tax efficiency, then who is the gainer? Lawyers, of course!

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