Regulators yesterday proposed new rules that would bar auditors from peddling questionable tax strategies and preparing tax returns for top executives whose companies' accounting they review, the latest move in a broad debate about ethics in the accounting industry.
The Public Company Accounting Oversight Board, created by Congress to help impose a new disciplinary regime on accountants after a series of corporate scandals, voted unanimously to issue the rules for public comment.
Two years ago, under intense lobbying from big accounting firms, Congress and the Securities and Exchange Commission declined to place limits on the kinds of tax services that auditors could provide clients. Instead, according to the current rules, corporate board members must preapprove any tax work that auditors might do.
But oversight board officials said yesterday that a series of recent disclosures about abusive practices, including widespread tax shelter marketing schemes uncovered by a Senate probe last year, had spurred them to act.
"The appearance that some in the profession assist corporate and other privileged clients to evade the rules . . . threatens the restoration of public confidence," board Chairman William J. McDonough said.
The board's plan is designed to ensure that accounting firms do not review their own advice and that their auditing judgments are not compromised by lucrative tax fees, officials said. Industry surveys suggest that the nation's four biggest accounting firms realize between one-quarter and one-third of their revenue from tax work.
Under the proposed rules, auditors would be barred from accepting contingent fees, which are set based on the success of a particular tax deal. They also would be prohibited from helping clients use any of about 30 questionable tax shelters monitored by the Treasury Department. Even if the deals do not explicitly fall into that category, auditors still must consider whether they amount to an "aggressive interpretation of applicable tax laws and regulations."
Board members Kayla J. Gillan and Willis D. Gradison Jr. said they would continue to track the way auditors dispense tax advice through the board's regular inspections of the biggest accounting firms. Gillan said the heightened monitoring would help prevent auditors from playing "definitional games" with the language in the rules.
The proposed rules would not impose a blanket ban on tax advice, a step that some consumer advocates had advanced two years ago. Auditors still would be able to perform routine tax work, including preparing tax returns for companies. They would also be permitted to prepare tax returns for some employees of client companies but barred from providing personal tax consulting to executives responsible for the companies' financial statements.
Ernst & Young LLP came under fire last year for advising two Sprint Corp. executives about how to avoid personal income taxes at the same time Ernst performed audit work for the company. The executives resigned under pressure after the Internal Revenue Service questioned the tax advice. Separately, a New York grand jury is investigating tax shelters promoted by KPMG LLP.
"Regulation is both necessary and appropriate under the circumstances," Barbara L. Roper, director of investor protection at the Consumer Federation of America, said in an interview.
The accounting board proposals will be open for public comment for 60 days before the oversight board takes a final vote on them. The plan also is subject to approval by the SEC. Donald T. Nicolaisen, the SEC's chief accountant, yesterday said in a prepared statement that the rules will be "helpful" to corporate board members who make purchasing decisions about tax work.
David Nestor, a spokesman for PricewaterhouseCoopers LLP, said the firm will "look forward to providing input" on a final rule. Charles Perkins, a spokesman for Ernst & Young, said the firm is "fully committed to continuing to work to enhance audit quality and investor confidence."
A spokeswoman for Deloitte & Touche LLP declined to comment. KPMG spokesman Thomas J. Fitzgerald said the proposed rules "appear to be balanced and provide a level of clarity" for auditors and clients.