Rethinking the Role of the Auditor: Resolving the Audit/Tax Services Debate
Paul D. Paton
Faculty of Law, University of Alberta
Queen's Law Journal, Vol. 32, No. 1, 2006
Queen's Univ. Legal Studies Research Paper No. 07-07
Expectations of the role of the audit professional in Canada and the United States have significantly changed in recent years. In the wake of Enron's collapse and the advent of the Sarbanes-Oxley Act in the U.S., there has been a new focus on the independence of the audit function. American legislative and regulatory reforms in 2002 and 2003 did much to clarify the independence issues surrounding auditors. However, whether auditing firms should be permitted to provide tax services to their audit clients remains unresolved. While the approach in the United States has been to permit the dual provision of audit and tax services, Canadian regulators continue to consider their response.
This paper reviews the legislative history of Sarbanes-Oxley and the history of tax services themselves. The author concludes that the U.S. Congress never intended to prevent auditors from providing non-audit services. This conclusion is substantiated by the final rule adopted in April 2006, which allows auditors to provide some tax services. The author finds merit in the U.S. response, because auditors have provided tax services for many years without any evidence of impaired independence and because the safeguards imposed by the new rule limit the possibility for abuse. However, because Canada uses a more principles-based approach to auditing and audit standards, the author concludes only that some of the U.S. rules are appropriate or necessary in the Canadian context.
The tax services debate illustrates the challenges in resolving issues of auditor independence. The five-year history of the debate reveals many of the considerations behind the need to balance efficient capital markets and investor protection. It also reveals the "expectations gap" between the reality of audit service provision and market conceptions of an auditor's role, which make it more difficult to find the appropriate balance. The author concludes that the U.S. result strikes an appropriate balance which enhances regulatory scrutiny yet maintains freedom in corporate choice of professional service providers.
Number of Pages in PDF File: 56
JEL Classification: M49, G38, G34, H25
Date posted: October 22, 2007