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Tax Services as a Trojan Horse in the Auditor Independence Provisions of Sarbanes-Oxley


Matthew J. Barrett


Notre Dame Law School


Michigan State Law Review, pp. 463-504, 2004

Abstract:     
This article argues that the failure of the Sarbanes-Oxley Act of 2002 (SOx) to prohibit auditors for public companies from also providing tax services to audit clients or their executives and selling tax shelters to anyone remains a Trojan horse that threatens both the investing public and the auditing profession. Although SOx enacted several reforms designed to enhance auditor independence, the legislation and implementing regulations that the Securities and Exchange Commission (SEC) subsequently promulgated allow an auditor for a publicly traded company to provide tax services to the company as long as the audit committee preapproves the engagement.

As the most vocal advocate in the legal academy for increased auditor independence, Professor Bernard Wolfman has repeatedly argued that a conflict of interest arises anytime an auditor offers significant tax advice to an audit client or promotes a tax shelter to anyone. Going beyond Professor Wolfman''s recommendations and in an effort to prevent further damage to the auditing profession's reputation, the public's confidence in the capital markets in this country, and the U.S. economy generally, this article argues that auditors for public companies should also not provide tax compliance services to audit clients or their executives. Accordingly, this article urges individual auditors, auditing firms, the accounting profession, audit committees, investors, and, if necessary, the newly created Public Company Accounting Oversight Board (PCAOB) and the SEC, to take those actions necessary to preclude auditors for public companies from providing tax services to audit clients or their executives and from promoting tax shelters to anyone.

While various tax services present potential conflicts of interest in differing degrees, drawing lines between different types of tax services, such as tax return preparation, tax consulting, and tax planning, presents very significant practical difficulties. Recognizing these practical difficulties, this article recommends a "bright line," best practice that would bar registered public accounting firms from rendering tax services to audit clients or their executives and promoting tax shelters to anyone. The article suggests that if an auditing firm embraces and advertises such a "total independence" policy, the firm may gain a competitive advantage in attracting new audit clients. Such an approach might even allow one or more non-Big Four accounting firms to compete favorably with the Big Four, reducing consolidation and increasing competition in the industry.

Number of Pages in PDF File: 42

Keywords: Enron, Andersen, audit failure, expectation gap, auditor independence, non-audit services, tax services, tax return preparation, tax consulting, tax planning, tax shelter, cognitive bias, unconscious bias, Sarbanes-Oxley, audit committee

JEL Classification: K22, K34

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Date posted: October 4, 2005  

Suggested Citation

Barrett, Matthew J., Tax Services as a Trojan Horse in the Auditor Independence Provisions of Sarbanes-Oxley. Michigan State Law Review, pp. 463-504, 2004. Available at SSRN: http://ssrn.com/abstract=813226

Contact Information

Matthew J. Barrett (Contact Author)
Notre Dame Law School ( email )
P.O. Box 780
Notre Dame, IN 46556-0780
United States
574-631-8121 (Phone)
574-631-4197 (Fax)
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