Tax Advice by Auditors
Originally sent: February 3, 2005You may or may not be aware that auditors are now required to follow much tighter ethical standards when they supply non-audit services to their clients. These standards came into effect from 15th December 2004 and apply to the audit of any periods commencing since that date. Where there is any perceived threat to the independence of the audit as a result of the non-audit services supplied, the new standards require the auditor either to eliminate the threat, refuse to undertake the services, or resign as auditor.
One area of importance where non-audit services may be provided is in the arena of tax. Over the last few years we have seen increasing numbers of accountants reluctant to advise their clients on taxation, other than simple tax compliance advice and calculations of their tax bills. I believe this trend will accelerate with the recent publication of the Auditing Practices Board Ethical Standard 5. The implication of this standard is that the recommendation by the accountants of any tax planning device which could have a material effect on the accounts could call into question the independence of the accountants if they also perform the audit. This even includes comments by the accountants on the effectiveness or otherwise of tax planning suggested by other advisers.
This is not to say that auditors cannot provide, for example, tax services or advice on tax planning techniques. What it does say is that auditors are likely to be more cautious in the future about getting involved. They are also likely to charge the client a lot more, given the hoops they may have to jump through in order to prove their independence. Just look at some of those hoops, taken verbatim from ES 5:
?Examples of such safeguards that may be appropriate when tax services are provided to an audit client include ensuring that:
? The tax services are provided by partners and staff who have no involvement in the audit of the financial statements
? The tax services are reviewed by an independent tax partner, or other senior tax employee
? External independent advice is obtained on the tax work
? Tax computations prepared by the audit team are reviewed by a partner or senior staff member with appropriate expertise who is not a member of the audit team or
? An audit partner not involved in the audit engagement reviews whether the tax work has been properly and effectively addressed in the context of the audit of the financial statements.?
I think different accounting firms will react in very different ways to the new standards. Some may decide the non-audit services are more lucrative than the audit fee ? especially now the audit threshold is so much higher ? but may charge such high fees that they price themselves out of the SME market. Some will probably join the growing throng who seem to believe that any form of tax planning is in some way unethical or immoral. Many will simply not want to get involved in any tax planning at all ? perhaps leaving the door wide open for well prepared financial advisers.
Over the next few months we should all watch for new opportunities that are likely to arise as a result of these changing attitudes ? and also be aware of the threats that may follow in train. Perhaps now is the time to take some refresher training on the various tax issues I cover in my numerous Focus Coaching Days.
Adviser Breakthrough Training Solutions Ltd. takes no responsibility for loss occasioned by any person acting or refraining from action, or in consequence of any other person acting or refraining from action, as a result of the material in this article.
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