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Proposed Rules for Independence of Public Company Audit Clients

The PCAOB's proposed rules outline prohibited tax services that could impair auditor independence. They address contingent fees, tax services to officers in financial oversight roles, and certain tax planning practices. The rules also specify permissible services subject to pre-approval, and requirements for audit committee pre-approval processes. The effective date, grandfathering of services, and transition provisions are detailed for compliance. Public comments are welcome until 2/14/05.

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Proposed Rules for Independence of Public Company Audit Clients

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  1. PCAOB PROPOSED RULES • Public Meeting on 12/14/04 • Identifies 3 additional prohibited tax services to public company audit clients that would impair independence

  2. PROHIBITION # 1 • Contingent fee or commission arrangements • Prohibits fees that are determined based on the results of judicial proceedings or the findings of govt. agencies • Permits fees fixed by courts or other public authorities that are not dependent on a finding or result

  3. PROHIBITION # 2 • Tax services to officers in a financial reporting oversight role • A person with influence over the contents of the financial statements or anyone who prepares them • As currently defined in Rule 2-01 of SEC Regulation S-X • Appendix illustrates CEO, President, CFO, COO, General Counsel, Chief Accounting Officer, Controller, Director of Internal Audit, Director of Financial Reporting, Treasurer, or any equivalent position • Whether paid by officer or issuer

  4. PROHIBITION RULE # 3 • Certain planning/opining: • Listed or confidential transaction • In accordance with Treasury regulations • Without regard to minimum fee threshold • Aggressive tax positions • Audit firm or any other tax advisor initially recommended; • Significant purpose is tax avoidance; AND • Tax treatment is not, at least more likely than not, to be allowed

  5. OTHER PROPOSED RULES • Permissible services (subject to pre-approval) • Routine tax return preparation/compliance • General tax planning/advice • International tax assignment tax services • Employee personal tax services

  6. OTHER PROPOSED RULES • Audit Committee Pre-Approval Process • Provide engagement letter detailing scope of services and fee arrangement • Including several aspects of tax compliance • Disclose any other compensation arrangements, e.g., referral fees • Discuss effect on independence • Whether auditor is capable of exercising objective and impartial judgment • Document discussion

  7. EFFECTIVE DATE • Effective date • Public comment period until 2/14/05 • Forward final rules to SEC for approval • Proposed effective date on the later of: • 10/20/05 • 10 days after SEC approval date

  8. EFFECTIVE DATE • Effective date • Grandfathered services • Tax services completed by effective date • Tax services to covered officers in connection with original returns filed no later than effective date • Grandfathered contingent fees • If paid in their entirety, converted to fixed fee, or otherwise unwound no later than effective date

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