Newsletter | Volume 1

Issue I
Issue II
Issue III
Issue IV
Issue V
Issue VI
Issue VII
Issue VIII
Issue IX
Issue X
Issue XI
Issue XII
Issue XIII
Issue XIV
Issue XV
Issue XVI
Issue XVII
Issue XIX
Issue XX
Issue XXI
Issue XXII
Issue XXIV
Issue XXV
Issue XXVI

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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.