BY GARY PURPURA
In 2002, Congress passed the Sarbanes-Oxley Act, or SOX, forever changing our view of the role of auditors and auditor independence. In the aftermath, companies wrestling with auditor independence rules and attendant regulatory scrutiny must decide whether their audit firm should be providing them with tax services. Although a number of companies continue to use their audit firm to perform tax services, the practice runs counter to regulators”™ professed preference for maintaining auditor independence.
SOX specifically points out the potential dangers of the same firm undertaking auditing and tax services for a single company. While auditors are not prohibited from providing routine tax work ”” as long as the arrangement receives prior approval from the audit committee ”” the practice may lead to potential or perceived conflicts of interest.
Regulatory enforcement under these stepped-up auditor independence standards has increased the level of risk for companies relying on a single audit firm for both audit and nonaudit work. In January, the Securities and Exchange Commission issued a Report of Investigation Section 21(a) explaining that ”” although tax services and other nonaudit services provided by an auditor may be permissible ”” the way they are provided may adversely affect the “auditor”™s independence, in fact or appearance.”
The heightened scrutiny from the SEC as well as the IRS, shareholders and the media is causing businesses to re-evaluate their audit relationships. Whereas auditors were once the primary providers of corporate tax expertise to their audit clients, we are seeing a rapidly growing number of companies choosing to separate their audit and tax services, leading to a decline in auditor-provided tax services among all businesses ”” both public and private.
Although one size does not fit all, there are compelling reasons for separating audit and tax work among two different providers.
Ӣ Avoid independence issues. Independence is paramount to the integrity of audit work. Audit firms cannot audit their own work without undermining their independence.
Separate audit and tax providers avoid auditor independence issues. Roles become more defined and pure; the audit firm ”” and audit committee ”” stay focused on audit while the tax firm concentrates on tax opportunities and the mitigation of tax risk.
Ӣ Advocate for best outcomes. SOX prevents an auditor from acting as an advocate, thereby limiting an audit-provided tax professionalӪs ability to provide advice. By comparison, a nonaudit tax specialist is free to counsel management and provide an opinion on important tax issues without generally being subject to questions of auditor independence.
Ӣ Centralize communication. It is a myth that keeping audit and tax services together within a single provider opens lines of communication. Companies have no guarantee that the audit and tax teams at a single accounting firm, particularly a large one, talk or share information with each other.
When audit and tax services are provided by two different firms, the company doing the hiring becomes the central point of contact, privy to all communication with both providers. As such, the company directs the messaging around what the business is and what the business does.
”¢ Competitive environment. The presence and interaction of two firms allows each to scrutinize the work of the other firm. With two firms vying for your business, clients can demand ”” and get ”” the highest-quality technical expertise from each firm.
Two heads are better than one. Separate audit and tax professionals will bring different knowledge sets to resolving complex tax problems, resulting in broader insights that can improve a company”™s decision-making.
In assessing whether to separate audit and tax functions, a company”™s tax profile is a key factor. As a company grows and its tax profile becomes more complicated, companies should consider separating their tax and audit relationships to preserve auditor independence and drive better tax outcomes.
Gary J. Purpura is managing partner of Stamford-based TaxOps, a tax specialty and advisory firm with offices at 1177 Summer St. in Stamford. Call the office at 203-307-2820.
