Audit Committee Issues
The following is an example of a typical question which must be faced by all public company audit committees.
QUESTION: Should the auditor be used for tax planning services?
Answer: Although tax planning services do not impair the independence of auditors, audit committees should consider whether using the auditor for tax planning services is in the best interest of the company. There are four issues that should be considered by the audit committee.
First, the auditor is prohibited by the auditor independence rules from providing an expert opinion or other expert services for an audit client, or acting as an audit client's legal representative, for the purpose of advocating an audit client's interests in litigation or in a regulatory or administrative proceeding or investigation. The effect of this prohibition is that the auditor is unable to assist the company in advocating the company's tax position before the Internal Revenue Service, since the Internal Revenue Service inquiry might be viewed as a "regulatory or administrative proceeding or investigation." Although the auditor is permitted to be a fact witness in such proceedings or investigations, his or her inability to advocate the company's tax position handicaps the company in the defense of its tax planning.
Second, if the auditor advises the company to take an aggressive position on its tax return, a conflict of interest may result. The auditor is required to audit the company's tax reserve and under the auditor independence rules, cannot audit its own work. There is difficulty in determining what is an aggressive tax position or a tax shelter as distinguished from routine tax planning.
Third, the auditor does not have the advantage of the attorney-client privilege or the work product doctrine which would otherwise shield its services and work papers from discovery by the Internal Revenue Service.
Fourth, CalPERS is reportedly withholding its votes for the election of audit committee members if the auditor provides non-audit services, other than preparation of tax returns and SEC compliance documents. Some audit committees have decided to use an accounting firm separate from their auditor for their tax planning and tax preparation work. This separation avoids all but the third problem mentioned above, namely the absence of any attorney-client privilege or work product doctrine. Audit committees should consider using a law firm for company tax planning, in order to preserve the attorney-client privilege and work-product doctrine, and using a separate accounting firm for tax preparation work.