In 2004, the Government Accountability Office (GAO) conducted an investigation o

Question

In 2004, the Government Accountability Office (GAO) conducted an investigation of tax shelters of 61 Fortune 500 users of tax shelters provided by accounting firms that were their external auditors covering more than one year between 1998-2003. In each case the company received benefits from the tax shelter: 61 companies had 82 transactions worth about S3.4 billion in estimated potential tax losses generally reportable to the IRS. What are the potential ethical dangers for an audit firm that provides tax shelters for an audit client? Is it ethically appropriate to do so under the profession's ethical standards? l)

Explanation / Answer

A potential ethic danger for a firm that provides tax shelters for an audit client is the CPA becomes anadvocate for the audit client to save taxes. The advocate position can threaten the objectivity andindependence in appearance. Under PCAOB Rule 3522, a rule that was issued in the aftermath of the taxshelter transactions, a registered public accounting firm is not independent of its audit client if the firm, orany affiliate of the firm, during the audit and professional engagement period, provides any non-auditingservice to the audit client related to marketing, planning, or opining in favor of the tax treatment of eithera confidential transaction or an “aggressive tax position” transaction. An aggressive tax positiontransaction is one that was initially recommended, directly or indirectly, by the registered publicaccounting firm and a significant purpose of which is tax avoidance, unless the proposed tax treatment is atleast more likely than not to be allowable under applicable tax laws.The SOX also requires that tax services provided for the audit client should be pre- approved by theaudit committee. Tax services are not restricted under the Act, but an audit committee may decide to helpgain the public trust by not permitting the auditing firm to do taxes.

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