PCAOB Member Wants a Closer Look at Tax Services and Auditor Independence

Last week the PCAOB approved its 2016 budget and also its "strategic plan" through 2019. That might sound like a more potent sleeping aid than tryptophan, but sometimes board members say interesting bits worth sharing and, today, we have some for you.

Each of the board members made pretty benign statements — quibbles about the budget process, thanking the staff, etc. — with the exception of Steven Harris's, which is little more pointed than the others:  

I believe, as emphasized throughout the Strategic Plan, that investor protection, improving audit quality and ensuring auditor independence must remain top priorities as the larger firms grow their consulting and advisory services which includes, by way of example, management consulting and investment banking.

As in prior years, in 2014 revenues from consulting and advisory services for these firms increased at a higher rate than audit. Revenue from consulting and advisory services now represents 41% of total revenues across the four major U.S. firms, exceeding audit's 35% share. For this reason, I support the initiative in the Strategic Plan to examine the evolution and structure of audit and non-audit services offered by the largest accounting firms and the implications of their multi-practice business model on independence and audit quality.

As part of this endeavor, the Board should consider any potential policy options that could mitigate risks to ensure that investor protection, audit quality, and auditor independence are not compromised as audit firms expand or add additional lines of business.

Alright, so Harris finds the growth of consulting work at Big 4 troubling. It's not exactly a new trend, but it is interesting that the PCAOB is now looking to study how the non-audit work became so pervasive and what the effects might be. There have been plenty of independence violations and the firms continue to dive into new service areas including creative and legal work.

But it's not just the exotic work that has Arthur Andersen spinning in his grave; back to Harris:

I am not convinced that the appropriate safeguards are currently in place to protect the independence and integrity of the assurance functions of these firms.

I also believe that the Board should examine whether certain kinds of tax consulting services create conflicts of interests that may impair auditor independence.

It always struck me as strange that tax services weren't considered prohibited services. Sure, audit committees have to approve them, but COME ON, some of those people don't bother reading the auditor letters, do you really think they agonize over whether the tax services compromise independence? Plus, it seems silly to suggest that tax services don't impair independence, especially if you conclude that the whole point behind tax services is to avoid taxes.

But while they were whipping up Sarbanes-Oxley, I'm sure the audit lobby said, "Look, you can call all this "prohibited services," just let us keep the tax services," and they said, "Oh, sure. As long as it's not consulting," and the lobbyists said, "It's definitely not consulting. It's tax compliance! Plus, those audit committees are filled with tough old coots, they won't let anything get by them." 

And yeah, lots of tax work is called "compliance" because, you know, laws and stuff. But laws, especially tax laws, are subject to a person (or a firm's) interpretation and that interpretation is more often than not, going to put the client (who, remember, is also an audit client) in a more advantageous position. That's a conflict, ergo, the firm isn't independent.

Now, I know plenty of people don't believe that and will tell you with a straight face why they don't believe it, but we all know the joke. And now maybe the PCAOB — at least Steven Harris — doesn't think it's funny anymore.

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