Auditor Independence Question: Advocacy Role 2408

  • Hi. I know this forum is mainly geared towards 404 compliance but I have a question on auditor independence on which I was not able to obtain much clarity, upon reading up on various rules.
    My question is on the rule that auditors cannot act as the company’s ‘advocate’. Is this solely on legal proceedings? Or does it apply on other services as well? Because there are a lot of services, even tax services, that I can see the auditors being our ‘advocate’. E.g. during a tax audit, the auditors help deal with the tax auditors (I see this more at our foreign locations). Our auditors call this ‘defense of tax audits’ and that language was presented to the Audit Committee without questions asked.
    Now I am wrecking my brains (and research powers) on a situation where a foreign branch of our independent auditors is providing a service where they basically act as our liaision and negotiate a tax ruling (specific to that country, in which you get some sort of rebate on certain types of expenses).

    1. If they help calculate the numbers, does that impair their independence? (I am not sure because those numbers do not go onto the financial statements, but are used solely for tax purposes.)
    2. Even if they do not calculate the numbers, does the fact that they present us in front of local tax authorities and ‘negotiate on our behalf’ get into the bucket of prohibited ‘advocacy roles’?
      Any thoughts/experiences would be appreciated.

  • Did you already check the SEC’s Final Rule on Strengthening the Commission’s Requirements Regarding Auditor Independence (Release No. 33-8183) dated 28 January 2003 in the Final Rules Section of the SEC website?
    I enclose some text from the rule below
    ‘The Commission reiterates its long-standing position that an accounting firm can provide tax services to its audit clients without impairing the firm’s independence. Accordingly, accountants may continue to provide tax services such as tax compliance, tax planning, and tax advice to audit clients, subject to the normal audit committee pre-approval requirements under 2-01©(7). Additionally, the rules we are adopting require registrants to disclose the amount of fees paid to the accounting firm for tax services. The rules are consistent with the Act which states that:
    A registered public accounting firm may engage in any non-audit service, including tax services , that is not described in any of paragraphs (1) through (9) of subsection (g) for an audit client, only if the activity is approved in advance by the audit committee of the issuer.110 (Emphasis added)
    Nonetheless, merely labeling a service as a ‘tax service’ will not necessarily eliminate its potential to impair independence under Rule 2-01(b).111 Audit committees and accountants should understand that providing certain tax services to an audit client would, as described below, or could, in certain circumstances, impair the independence of the accountant. Specifically, accountants would impair their independence by representing an audit client before a tax court, district court, or federal court of claims. In addition, audit committees also should scrutinize carefully the retention of an accountant in a transaction initially recommended by the accountant, the sole business purpose of which may be tax avoidance and the tax treatment of which may be not supported in the Internal Revenue Code and related regulations.112’.
    Typically when a tax adviser prepares a ruling request and discusses it with the tax authorities then the subject is usually not that aggressive otherwise they would not describe the facts in a ruling request and alert the tax authorities to the issue with the request (and incurr the risk of a later tax audit). In my opinion this is still a normal part of tax advice.
    In the same rule is also a description of legal services, which are basically services by somebody who needs to be licensend in his jurisdiction to practise law.
    I suggest you ask your audit firm what their opinion is whether providing those services would be a problem under the SEC’s and the PCAOB’s rules on auditor independence and prohibited non-audit services.

  • Thank you, gmerkl. I did read the final rule. And I also am in discussions with the external auditor and our legal counsel. Neither of them is too sure in this situation, so I am taking the lead to do some research.
    I think I am going to analogize this new service with tax audit defense - which to me are similar type of services. Additionally, I do not find anything that describes the prohibited advocacy role except for in the legal proceedings or expert services setting. You brought up a good point that the fact the auditor is discussing this with the tax authority, probably illustrates that it is not related to an aggressive tax position.
    Thanks again.

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