A Comparative Assessment of EU, UK, French, Australian and Japanese Responses to Auditor Independence: The Case of Non-Audit Tax Services
Richard Thompson Ainsworth
Boston University - School of Law; NYU - Graduate Tax Program
Tax Notes International, Vol. 1, 2004
Boston Univ. School of Law Working Paper No. 06-28
Auditor independence was a global concern of financial regulators in the 1990's. Some observers saw this in a positive light, a natural development. Adjusting auditor independence rules was a manifestation of global convergence in corporate governance structures. New rules, especially rules leaning toward a harmonized system were welcome.
There was a more sobering view. This view held that global regulators were less concerned with convergence than they were with a sense of impending disaster. Things had gone too far. Significant, maybe even radical change was needed. The independence of corporate auditors had eroded; trust had been fundamentally compromised in the quest for audit firm profits. Corrective measures were needed immediately to avert widespread financial collapse.
The new century did bring startling events: the collapse of HIH (March, 2001) and One.Tel (July, 2001) in Australia; the bankruptcy of Enron (October, 2001), and WorldCom (June, 2002) in the US. In the EU similar scandals broke. There was Vivendi (July 2002) in France, Ahold (February, 2003) in the Netherlands, and Parmalat (February, 2003) in Italy. Were the early years of this century a time of global convergence or a time of financial collapse attributable to widespread accounting failure?
This paper considers global changes in the regulation of the statutory corporate auditor. It focuses on non-audit tax services as an instance where real movement toward convergence of corporate governance can be seen.
The US has responded to the most serious criticisms of its rules-only-based method of setting standards. With respect to non-audit services generally, the US has eliminated exceptions, limitations, bright-line and percentage tests. Specifically in the area of tax services, the US is directly tying principles with operational rules. This represents a significant movement toward a principles-based method of setting standards.
For its own part, the US has been critical of foreign principles-only standards. In particular, the US is critical of these regulations when they do not provide a sufficiently detailed structure, resulting in a standard that is not clearly operationalized. The SEC feels that principles-only-based rules depend too much on the exercise of individual judgment.
Like the UK, the US believes that more direction is needed. The rules need not be as restrictive as the French envision, but they need to be considerably more specific than the rules that have been advanced in the EU and Australian legislation. The US is no longer comfortable with the assumption of the Levitt regulations, an assumption that still underpins rules in the EU, Australian and elsewhere, that the tax authorities provide enough oversight of the auditor in tax matters so that security regulation can be relaxed.
Number of Pages in PDF File: 24
Keywords: Sarbanes-Oxley, Eigth Corporate Directive, CLERP 9, Loi de Sécurité Financière, Non-audit Tax Services, Levitt reforms, Kouninkaikeishihou no ichibu wo kaisei suru houritsu, Principles-based standards, Rules-based standards, Path dependency, Enron
JEL Classification: E62, F39, F33, G34, G38, H2, K20, K34Accepted Paper Series
Date posted: September 6, 2006
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