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December 26, 2002

Mr. Jonathan G. Katz, Secretary
U.S. Securities and Exchange Commission
450 Fifth Street N.W.
Washington, D.C. 20549-0609

Re: File Number S7-49-02

Dear Mr. Katz:

We at PricewaterhouseCoopers appreciate the opportunity to comment on the Commission's Proposed Rule: Strengthening the Commission's Requirements Regarding Auditor Independence.

We fully support the Commission's recent efforts to strengthen investor confidence by strengthening and clarifying the rules regarding auditor independence.

In order to provide the most meaningful input, we have decided to immediately submit this letter to provide our comments on the proposal as it relates to the scope of permissible tax services. Additional comments on the proposed rule, including those affecting tax, will be submitted at a later date.1

We have several comments that we respectfully submit to the Commission for its consideration.

Our main comments are summarized in this letter. We have also provided responses to the specific questions the Commission has asked within the proposed rule in Exhibit A attached to this document.

Congress clearly expressed its view that tax services do not violate auditor independence and should not be prohibited.

In enacting the Sarbanes-Oxley Act of 2002, Congress ratified the long-standing view of the Commission that the provision of tax services is not inconsistent with auditor independence. Congress could not have been clearer in its intent; it crafted the statutory language in order to unambiguously omit tax services from the list of prohibited services and went so far as to actually single out tax services and name it as a service that is permitted if approved in advance by the audit committee.

The clarity and specificity around the permissibility of tax services is consistent with Congress' stated goal of "draw[ing] a clear line around a limited list of non-audit services that accounting firms may not provide to public company audit clients." (S. Rep. No. 107-205, 107th Cong., 2d Sess., at 18 (2002)). Congress was direct in its call for clarity in the rules, stating "that it is appropriate to continue dealing with nonaudit services by having the Commission proscribe specific services rather than casting doubt on a broad range of nonaudit services." (H. Rep. No. 107-414, 107th Cong., 2d Sess., at 2 (2002), emphasis added).

The language in the proposed rule and much of the related commentary demonstrate that the Commission understands and intends to honor Congress' desire to have clear rules that continue to allow tax services to be provided to public audit clients, subject to pre-approval by the audit committee. In this regard the proposal states:

Nothing in these proposed rules is intended to prohibit an accounting firm from providing tax services to its audit clients when those services have been pre-approved by the client's audit committee. As discussed in our previously proposed rules on independence, tax services are unique, not only because there are detailed tax laws that must be consistently applied, but also because the Internal Revenue Service has discretion to audit any tax return. (67 FR 76790)

The proposal re-emphasizes this point later in the text explaining that:

Tax services traditionally have been viewed as closely related to audit services and as not being in conflict with an auditor's independence. (67 FR 76798)

Given this language and the Commission's unbroken tradition of recognizing that tax services are consistent with auditor independence, we will not devote additional time in these comments analyzing the legislative history or policy arguments that support the Congressional decision to continue to permit tax services to be provided to public audit clients.

The commentary regarding tax services casts unnecessary doubt over the scope of permitted tax services.

Notwithstanding the clear Congressional intent that tax services be allowed and that "clear lines" be drawn around what is prohibited, we believe that the commentary in the release related to "Tax Services," perhaps unintentionally, casts significant doubt on the scope of tax services that are permitted.

Read in its entirety, the proposal strongly suggests that a very broad range of tax services continues to be viewed as consistent with auditor independence. The "Tax Services" section of the commentary directly states:

While we do not define "tax services," we understand that tax services can include a range of activities including the preparation of tax returns, tax compliance, tax planning, tax recovery, and other tax-related services. In addition, many engagements will require that an auditor review the tax accrual that is included in the financial statements. Reviewing tax accruals is part of audit services and is not, in and of itself, deemed to be a tax compliance service. (67 FR 76790)

In the section discussing Expanded Disclosure in proxy statements, the Commission adds even more clarity to what it views as permitted:

The "Tax Fees" category would capture all services performed by professional staff in the independent accountant's tax division2. Typically, it would include fees for tax compliance, consultation and planning. Tax compliance generally involves preparation of original and amended tax returns, claims for refund and tax payment-planning services. Tax consultation and tax planning encompass a diverse range of services, including assistance and representation in connection with tax audits and appeals, tax advice related to mergers and acquisitions, employee benefit plans and requests for rulings or technical advice from taxing authorities. (67 FR 6799)

These statements, coupled with the other language about tax services quoted above, give the strong, and we think correct, impression that the current framework regarding permissible tax services is intended to remain in place.

However, the commentary includes additional language that undermines that impression and creates substantial doubt as to what services may be prohibited. Specifically, the following language has generated enormous uncertainty in the marketplace and a sense of concern among audit committee members and auditors as to whether bright lines exist at all:

Classifying a service as a "tax service" however, does not mean that the service may not be within one of the categories of prohibited services or may not result in an impairment of independence under Rule 2-01(b). The accounting firm and the registrant's audit committee should consider, for example, whether the proposed non-audit service is an allowable tax service or constitutes a prohibited legal service or expert service. As part of this process, the accounting firm and the audit committee should be mindful of the three basic principles which cause an auditor to lack independence with respect to an audit client: (1) the auditor cannot audit his or her own work, (2) the auditor cannot function as a part of management, and (3) the auditor cannot serve in an advocacy role for the client. For example, where an accountant provides representation before a Tax Court the accountant serves as an advocate for his or her client and the accountant's independence would be impaired. Another example would be the formulation of tax strategies (e.g. tax shelters) designed to minimize a company's tax obligations. The provision of these types of services may require the accountant to audit his or her own work, to become an advocate for the client's position on novel tax issues, or to assume a management function.

We also are considering whether special considerations apply when the auditor provides a tax opinion for the use of a third party in connection with a business transaction between the audit client and the third party. The tax opinion may be vital in the audit client's efforts to induce the third party to enter into the transaction, particularly when the transaction is tax-driven. Under those circumstances, the auditor may be acting as an advocate for the audit client by actively promoting the client's interests.

In our broader submission on the balance of the proposal, we intend to discuss in greater detail the need for clarity and guidance around the three principles, but for purposes of this submission we respectfully suggest that the inclusion of this language in the commentary is inconsistent with the language of the rule which does not place any tax services in a prohibited category. The above-quoted discussion gives the distinct impression that the Commission does believe that certain tax related services may be inconsistent with auditor independence and should be prohibited. Having thus undermined its earlier, clear statements about the permissibility of tax services, the proposal then fails to identify prohibited tax services with sufficient precision to guide auditors and audit committees in a good faith endeavour to determine what services may appropriately be provided. This lack of clarity leaves open the potential for inconsistent application of the rules by audit committees and creates much confusion in the marketplace. The de facto result is that audit firms will be prevented from providing tax services to audit clients; which, we believe, would inevitably lead to a reduction in audit quality.

With regard to representation in Tax Court, the commentary notes that it is prohibited on the grounds that it involves impermissible advocacy. With no definition or guideposts for what constitutes advocacy, one might be led to believe, looking at the statement regarding Tax Court representation, that tax audit and appeal services are also "advocacy" and therefore prohibited.3 By contrast, the commentary on Enhanced Disclosure regarding fees states (consistent with the plain language of the proposed rule) that audit and appeal services are permitted because the commentary directs that fees for such services would be disclosed in the "Tax Fees" category. This apparent inconsistency creates enormous and unnecessary ambiguity that is at odds with the goals of drawing a bright line around the prohibited services and permitting the continued provision of traditional tax services by auditors.

The language stating that it would violate one or more of the three basic principles to provide "tax strategies (e.g. tax shelters) designed to minimize a company's tax obligations" adds to this ambiguity. Fundamentally all tax planning services and any advice regarding potential tax treatments of transactions could be characterized as services "designed to minimize a company's tax obligations" and we believe there is nothing objectionable about the provision of these services. It is clear that neither Congress nor the Commission intends to prohibit all such services. Again, including this language in the commentary creates an ambiguity that would prevent people acting in good faith from knowing where the intended "clear line" falls. One is left with the unmistakable impression that the Commission does believe that certain services provided by tax professionals should be and are prohibited, notwithstanding the absence of any language in the proposed rule (much less the Act or its legislative history) that would support such a conclusion.

For clarity, the Commission should be explicit if it believes that there are services provided by tax professionals that impair auditor independence.

As discussed above, we believe that it is clear that Congress recognized and articulated that the public interest was best served by carrying forward the longstanding tradition of permitting auditors to provide tax services to their public audit clients. As the proposal commentary explains, detailed laws and the oversight of the Internal Revenue Service and other Taxing Authorities provide a serious check and balance on the behaviour of tax professionals and taxpayers alike. Accordingly, we believe the most appropriate approach would be for the Commission to leave the rule as written and clarify in the commentary accompanying the final proposal that the provision of all lawful tax services remains consistent with auditor independence. In the context of the entire proposed rule, this would give the audit committee the guidance it needs to determine and pre-approve the level of tax service it feels is in the company's best interests for the auditor to provide, while giving investors the information they need in the proxy disclosure to assess the judgments made by the audit committee.

However, if the Commission is convinced, notwithstanding Congressional statements to the contrary, that certain tax services by their very nature would impair independence, then we urge the Commission to carefully define what those services are and include those narrowly defined services in the list of prohibited services in the rule. To further enhance the clarity of the final rule, we also recommend that the commentary omit the currently ambiguous language and include a demonstrative, non-exclusive list, of traditional tax services that continue to be permitted. Based on various statements in the proposal and our experience, we believe that the following language would largely capture the non-controversial aspects of tax practice and provide important guidance to audit committees and auditors in ensuring consistent, ongoing compliance:

"Tax services" are services that relate to the determination of the issuer's tax liability or that involve the providing of advice and assistance regarding the issuer's business operations and transactions to take account of the tax laws. These services include, but are not limited to, tax compliance; tax consultation; tax planning and implementation; assistance and representation in connection with tax audits and administrative proceedings and appeals; tax advice related to mergers, acquisitions, other business transactions, employee benefit plans and compensation arrangements; requests for rulings and technical advice from taxing authorities; advice and assistance on pending or proposed tax legislation; tax opinions; trade and customs service to ensure compliance with trade laws and regulations while trying to avoid, reduce, or defer overall customs duties; and valuation or appraisal services that are a reasonable and necessary part of the performance of the foregoing.4

We recognize the difficulty in appropriately defining those services which may be of concern to the Commission, and for that reason we believe that regulation of those services is better left to the Internal Revenue Service and Tax Authorities around the globe. But if the Commission feels that it must address this subject in the context of auditor independence, the very difficulty of the definitional exercise strongly argues for the Commission to deal with the matter directly rather than leaving it to audit committees for whom the challenge, we believe, will be insurmountable.

By following this approach, we believe that the Commission can in the area of tax services fully deliver on the intent of Congress to "draw a clear line around" prohibited services and avoid "casting doubt on a broad range of nonaudit services."


We appreciate the opportunity to express our views and we commend the Commission and its Staff for the speed in which it continues to focus on strengthening investor confidence by strengthening and clarifying the auditor independence rules.

We will be pleased to discuss any of our comments or answer any questions that you may have. Please do not hesitate to contact Hilary Krane at 415-498-7601 regarding our submission.




  • We request comment on whether providing tax opinions, including tax opinions for tax shelters, to an audit client or an affiliate of an audit client under the circumstances described above would impair, or would appear to reasonable investors to impair, an auditor's independence. No. Providing a tax opinion to a client is more closely analogous to providing an audit report than to being an advocate. The tax professional applies his knowledge of the law to give the client an objective read on how the laws and regulations will be applied to a given situation. This exercise is subject to an umbrella of regulation and oversight provided by the tax authorities in the relevant jurisdiction. If the client provides the opinion to a third party, the third party still makes its own independent judgement on whether to proceed. This is analogous to a client providing an audit opinion to a lender to obtain financing; a practice, which has never been - and is not now - viewed as an impairment to auditor independence.

  • Are there tax services that should be prohibited by the Commission's independence rules? No. As discussed in the text above, Congress clearly intended to adopt the Commission's unbroken tradition of recognizing that tax services are fully consistent with auditor independence and that it is beneficial to corporate America and investors alike to allow audit firms to continue to provide tax services as doing so enhances both audit quality and tax compliance.

  • Is it meaningful to categorize tax services into permitted and disallowed activities? If so, what categories and related definitions would make the demarcation meaningful? As stated in the text, we believe that Congress rightly intended all tax services to be permitted and, thus, no such categorization should be required. Having said that, if the Commission determines that prohibiting certain tax services is appropriate, it should follow the suggestions made in the main body of the letter to narrowly define such services, and then directly and clearly prohibit them while specifically allowing all other tax services. That is the best way to provide the certainty that Congress intended and the marketplace deserves.

1 Very important practical implementation challenges and threats to overall audit quality are implicated in the way other aspects of the proposal - most notably rotation and compensation - apply to the tax practice. However, as those proposals present issues that are of a general nature (and not just tax specific) they will be addressed completely in our later broader submission. In addition, we do not address the matter of tax services provided by associated law firms overseas, which we will include in our broader submission when we address legal services.
2 Our broader submission on the balance of the proposal will address the fact that the broad construct of this sentence suggests, inappropriately we believe, that fees for tax staff who participate on the audit by, for example, reviewing the tax accrual, would be reported as Tax Fees rather than Audit Fees.
3 In our broader submission, we will suggest that the concept of "advocacy" needs to be defined as speaking on the client's behalf in a public forum. Such a definition, if adopted, would clarify that appearing in Tax Court proceedings is problematic but providing services in connection with the audit and appeal are not.
4 We believe that providing a list of these acceptable services will significantly help audit committees by making it clear that the Commission (following the lead of Congress) believes that these traditional tax services can be provided without violating the three basic principles, and we would urge the Commission to include a statement directly to that effect in the commentary.