US Corporate Governance Bill May Help Private Tax Firms

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

30 October 2002

The corporate governance 'Sarbanes-Oxley' Act which the US Congress recently passed in response to a slew of fraudulent corporate collapses has as its primary purpose the improvement of transparency for public companies, whether US or foreign, but there is a growing realisation that it may have substantial knock-on effects for the accounting and consultancy professions, including their tax advisory activities.

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 president of the Nasdaq has criticized the tougher corporate governance rules for the extra burdens they will place on small companies. Writing on his ecommercetax.com site, Professor David Hardesty speculates that smaller public companies in particular will be hit hard by the new rules, and that many may choose to return to the private sector, with beneficial results for the smaller CPA firms that specialise in serving private companies.

Says Professor Hardesty: 'Auditors of public companies are restricted in the services they can perform for their clients. In some cases auditors will be prevented from performing anything but audit services. They may even be prevented from performing tax planning and consulting services. This means that a company will have to hire a separate firm, or firms, for the services it normally buys from its auditors.

'Audit fees will go up as auditors are required to perform additional procedures to comply with the new rules that result from Sarbanes-Oxley.

David Hardesty also points out that the new law will limit the ability of companies to use the traditional route of hiring ex-audit staff into mainstream financial or advisory positions, again meaning that they will need to resort to outside sources for assistance which might before have come indirectly from their big 5 auditors.

All in all, says the Professor: 'This creates a new market for the vast majority of CPA firms that do not perform services for public companies. By choosing a local or regional accounting firm for its audit, tax, and consulting services, a formerly public company gains the following advantages: management control over auditors, lower fees, and a broad range of services.'

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