Tax issues and the Audit Committee
In this article, we review the limitations of using
the external auditor for tax planning services and should the audit committee
permit tax shelters to be sold by non-audit partners of the external auditor.
The new duties and responsibilities
of the Audit Committee go beyond a number of preferable accounting policy
and procedural issues so that audit committee members fulfil their oversight
role.
Issues for review by the audit committee
Issues of attorney-client privilege and work papers in a company's Tax
planning exercise. The new laws on monitoring are not limited to a limit
on an auditor's non-audit services - as part of the safeguards the audit
committee is required to ensure the auditor independence?
Tax planning services do not per say impair the independence of the external
auditors. However, the audit committees should consider a number of scenarios
to determine if the auditor is in the best interest of the company for
tax planning services. These are the general
Routine tax planning
The first reason is that the auditor is prohibited (due to the independence
rules) to provide an expert opinion or make a 'decision' on behalf of
the client. As part of providing expert services or acting as a legal
representative, the auditor extends its independence boundaries. The result
of this limitation is that the auditor cannot later assist the company
in advising on the company's tax position or safeguarding the client's
interests in a possible litigation, a regulatory or administrative proceeding
or investigation or an issue with the tax authorities.
In particular cases, the auditor is permitted to be a fact witness in
a regulatory or administrative proceeding or investigation. However, his
or her inability to back the company's tax position handicaps the company
in the defence of its tax planning.
Aggressive tax position often requires a tax shelter
The next issue surfaces if management decides to take an aggressive position
on its tax return, and the external auditor is involved. A conflict of
interest may result if an accrual or reservation is required to offset
the possible rejection from the authorities.
Another general problem is that if the auditor audits the company's tax
reserve he has to check and control his work. That is prohibited under
the auditor independence rules. Therefore, when tax planning is part of
any companies consideration, there can be placed unnecessary strain on
the audit client relation.
Segregation of Tax duties
Since the external auditor does not enjoy the advantages of an attorney-client
privileges, the work papers and documentation from the audit services
provided, cannot be protected from delivery to the oversight authorities,
in the case of a dispute or litigation.
Therefore, in most cases, the audit committee must carefully examine the
consequences of the audit company providing tax advice as part of the
non-audit services, other than preparation of tax returns and other oversight
compliance documents.
An option for the audit committees is to use another accounting firm for
their tax planning and tax preparation work. This separation cannot address
the absence of attorney-client privilege or work product doctrine. Then
perhaps the Audit committees can consider using a law firm for company
tax planning.
