The Public Company Accounting Oversight Board (PCAOB) has approved two proposals designed to clarify possible conflicts of interest between a public auditing firm and a potential client by increasing transparency of existing relationships.
First, it approved Rule 3526, which, if endorsed by the Securities and Exchange Commission (SEC), would require auditing firms to inform audit committees in writing of any relationships that could impair the auditor's impartiality. The disclosure would reveal all ties between the firm, or its affiliates, and the potential client, or those that have a financial reporting oversight role there, that could challenge its independence.
The new rule requires accounting firms to provide this information before an audit begins–and, then, annually for continuing audits. It supersedes Independence Standards Board (ISB) Standard No. 1, an interim rule that only required that the information be made available after an audit. The PCAOB regulation comes almost seven years after the Securities and Exchange Commission (SEC) abandoned the ISB as a source of new and improved independence standards for auditors of U.S. public companies.
At the same time, the PCAOB amended Rule 3523 to allow an auditing firm to provide tax services to a corporate executive during the audit period prior to the professional commitment. It narrows the scope of the existing standard, which declared that an auditing firm was not independent if it provided tax services to an executive at a client firm who held a financial reporting oversight role (or an immediate member of their family) during the audit and professional engagement period.
The PCAOB says it determined that providing tax services to such individuals during that time does not necessarily impair a firm's independence. The amendment to Rule 3523 would become effective immediately if approved by the SEC.
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