Using an Independent Tax Service Provider

Separation of Advocacy from Auditing:

Many accounting professionals and some in the legal profession have maintained that an auditor cannot be an advocate for a client’s position and yet maintain independence.  Traditionally, CPAs who provide auditing services to their clients are prohibited from advocating their client’s position in certain tax matters beyond the administrative appeal level.  Sarbanes-Oxley has limited the types of services that auditors may provide to their clients.  By separately engaging a different CPA to provide tax services, the client is gaining access to a full advocate unencumbered by auditing opinion concerns.  The tax CPA is free to prepare tax provisions and contingent schedules (tax “cushion” analysis) without regard to violating this advocacy standard.  The auditor is free to be critical of another’s work.  It is recognized that an auditor cannot audit his or her own work.  Accordingly, having separate service providers eliminates these difficulties.

Greater Flexibility in Obtaining Services

The use of separate service providers increases flexibility in obtaining the services of replacement service providers.  It is not uncommon for CFOs and Controllers to want to change their CPA firm because they are unhappy with either the tax or audit services.  Frequently, they do not change because the fear that they will lose access to the part of the firm that they need because of a special event or transaction, or it is too inconvenient.  Consciously separating service providers allows one to change service providers with less friction.  Switching auditors does not effect the tax relationship, while switching tax service providers does not effect the audit relationship.  In addition, if a switch is made, access to a valuable level of historical knowledge will be maintained.

Implementation of Tax Strategies

Many middle market firms are driven more by tax concerns than publicly listed companies.  Using a separate tax service provider allows for the maintenance of tax strategies without regard to audit concerns.

Synergy

The belief that there is synergy between the audit and tax departments in large accounting firms has been overstated.  The objectives of tax are different than financial statement audits.  Tax is more concerned with maximizing profits by minimizing taxes.  Financial statements auditors are more interested in minimizing their risk by minimizing income, minimizing assets or maximizing liabilities.  In addition, tax professionals who are part of the audit firm’s team are required to identify accounting issues for the auditors.  Their ability to be an advocate for the client is limited.  

Independence Issues

There are more restrictions on auditors when performing contingent fee engagements. The auditor’s ability to enter into contingent fee engagements can be restricted under the American Institute of CPAs ethics rules and state CPA regulations.  In addition, Sarbanes-Oxley also suggests greater restrictions on providing tax services and sophisticated planning to publicly traded attest clients.

For publicly traded firms, the use of a tax service provider independent of the audit firm eliminates independence and advocacy concerns, and the requirement that the internal audit committee approve such services.  The auditor’s fee disclosures are also eliminated.  In addition, the tax provider is free to develop original financial information for the client such as journal entries and original workpapers.  The tax provider is also relatively free to provide financial system consulting services in such areas as sales/use tax and property tax software systems.  Independent tax providers are also free to take on major outsourcing roles such as preparing sales tax returns, preparing checks, signing checks, and signing returns under a power of attorney arrangement.

Business Advisor Issues

It’s easier to plan acquisitions without the participation of the audit firm’s tax department.  Frequently, clients worry that working with the tax personnel of the audit firm will develop audit issues down the road.  Tax brainstorming and other creative activities are more easily accomplished without the “specter” of an auditor during the process.  We find that many of our due diligence engagements are with non-clients who like to brainstorm with another firm before presenting the transactions to their auditors.

Business Management Issues

From a business perspective, having access to more than one firm will increase competition and help contain fees.