New tax prep ethics rules for public accounting firms.

Recently, new tax prep ethics rules were created in response to the growing incidences of tax fraud. The rules will become official when the SEC accepts them later this year--causing a significant shift within the accounting profession by changing the way public companies work with accounting firms.

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A. Michael Hirsh, CPA, tax partner and director for Fort Worth, Texas-based Weaver and Tidwell's Tax and Business Services line is well-versed on the new PCAOB rules and can address the ever-evolving issue of independence. Hirsh has 29 years' experience in public accounting, with extensive practice concentration in tax and strategic planning.

"Before the end of 2005, the SEC is expected to approve the rules proposed by the PCOAB late in 2004; they published the rules in July 2005," he says. With the new rules, "CPAs could lose their independence if they had a contingent fee arrangement and if they were consulting on tax matters relating to a tax shelter.

"One other new independence rule that is the most significant change is the accounting firm may no longer provide individual tax services for management executives of the company that are in a financial oversight role (defined by SEC rules) with the company being audited. This includes the CEO and responsible parties defined by the SEC in a prior announcement."

Hirsh says this only will apply if those individuals currently are having their tax work done by the firm.

"The fee for the audit should be more significant, so it is likely the accounting firm will be giving up the tax work for those individuals," he adds. "The PCOAB only governs public companies that are registered with the SEC."

Accounting firms will send the work to other firms. "This is a continuation to exhibit independence in the public eye for auditing firms of public companies," says Hirsh. "Firms were limited from providing HR, actuarial, technology implementation, valuation and internal auditing services. Now they are limiting accounting firms from providing individuals of the public firm. It does not include board of directors or management that is not in an accounting oversight role."

In the ruling, there is a discussion about subsidiaries and affiliates that is governed by materiality and who audits the subsidiaries. Between now and June 30, 2006, firms could perform tax services now provided, but would need to be completely divested of those services at that time.

In a separate ruling, Rule 35-24, the auditing firm that performs any non-auditing services tax services must provide to the internal audit committee a description of the services and the potential impairment of independence, along with a documentation of the conversations with the internal audit committee.

"For example, the auditing firm is called by the audited company for advice on local taxes; now the firm has to document the above procedure before taking on the assignment," says Hirsh. "The foundation of the accounting profession is one of independence in substance and appearance. The new rules are a continuation of the heightened ethical & independence requirements in this post-Enron world."