Accounting industry regulators are set to impose strict new limits on the kind of tax work that auditors can perform for their clients in a long-awaited vote today.
Under the plan, auditors would be banned from selling abusive tax shelters and preparing tax returns for top executives at companies whose accounting practices they review. The move is designed to ensure that auditors' judgments about accounting are not compromised by lucrative tax fees.
The Public Company Accounting Oversight Board first proposed the limits in December, after Ernst & Young LLP, KPMG LLP and PricewaterhouseCoopers LLP came under fire for marketing tax-avoidance deals to clients.
The Justice Department is considering whether to bring criminal charges against KPMG in connection with its sale of tax shelters as well as possible obstruction-of-justice charges, according to news reports. The firm issued a statement last month saying it is cooperating with investigators and is taking "full responsibility for the unlawful conduct by former KPMG partners."
Separately, Ernst drew criticism in 2003 for advising two Sprint Corp. executives how to avoid paying steep personal income taxes at the same time Ernst did audit work for the company. The Sprint executives later resigned.
Under current practices, corporate board members must give prior approval for any tax work that auditors perform, but beyond that there are no limits.
Since the passage of corporate accountability reforms in 2002, investor advocates have called on the board to prohibit auditors from providing any tax services to clients, but the new rules do not go that far.
Even so, the accounting board plan has drawn 800 mostly supportive public comments. Sen. Carl M. Levin (D-Mich.), who led a Senate probe into the role of accounting firms in selling tax shelters, has said the rules "would help restore auditor independence, increase investor confidence in corporate financial statements, and rein in abusive practices within the U.S. tax shelter industry."
If the board approves the rules, as is expected, they still must undergo scrutiny by the Securities and Exchange Commission before taking effect.