1. Tax Services Provided to Audit Clients: PCAOB view and the report of the IFAC Tax Services Review Group IFAC SMP Permanent Task Force March 8, 2005 Prague presented by Dr. Helmut Klaas, IDW, Germany

2. 2 Structure I. Background of the topic II. The PCAOB rulemaking docket dated December 14, 2004 III. Reaction of the accounting profession IV. Main critical areas of the PCAOB rulemaking docket V. Possible impact on legislations outside the US VI. IFAC‘s Tax Services Review Group‘s report on tax services and the accounting profession VII. Conclusions and recommendations I. Background of the topic II. The PCAOB rulemaking docket dated December 14, 2004 III. Reaction of the accounting profession IV. Main critical areas of the PCAOB rulemaking docket V. Possible impact on legislations outside the US VI. IFAC‘s Tax Services Review Group‘s report on tax services and the accounting profession VII. Conclusions and recommendations

3. 3 I. Background of the topic (1)  Restrictions on tax services to audit clients in the past EU Recommendation, IFAC Code of Ethics / Sarbanes-Oxley Act / SEC 2003 Independence Rules  Recent developments in the US PCAOB Round Table July 14, 2004 Issuance of rulemaking docket Dec. 14, 2004  Impact on SMEs / SMP  Involvement of IFAC Tax Services Review Group  Restrictions on tax services to audit clients in the past EU Recommendation, IFAC Code of Ethics / Sarbanes-Oxley Act / SEC 2003 Independence Rules  Recent developments in the US PCAOB Round Table July 14, 2004 Issuance of rulemaking docket Dec. 14, 2004  Impact on SMEs / SMP  Involvement of IFAC Tax Services Review Group

4. 4 II. The PCAOB rulemaking docket dated December 14, 2004 (1)  Three cases of assumed impairment of auditor’s independence Contingent fee arrangements Abusive or potentially abusive tax transactions (tax shelter constructions)  listed transactions  confidential transactions  aggressive tax positions Tax services to senior officers in a financial reporting oversight role  persons with direct responsibility for oversight over those that prepare the issuer’s financial statements and related information  Three cases of assumed impairment of auditor’s independence Contingent fee arrangements Abusive or potentially abusive tax transactions (tax shelter constructions)  listed transactions  confidential transactions  aggressive tax positions Tax services to senior officers in a financial reporting oversight role  persons with direct responsibility for oversight over those that prepare the issuer’s financial statements and related information

5. 5 II. The PCAOB rulemaking docket dated December 14, 2004 (2)  Tax services compatible with auditor’s independence Routine tax return preparation and tax compliance General tax planning and advice International assignment tax services Employee personal tax services  Tax services compatible with auditor’s independence Routine tax return preparation and tax compliance General tax planning and advice International assignment tax services Employee personal tax services

6. 6 II. The PCAOB rulemaking docket dated December 14, 2004 (3)  Pre-approval requirements for permissible tax services Audit firm seeking pre-approval of the client’s audit committee would be required to  provide the audit committee with detailed documentation of the nature and the scope of the proposed tax service  discuss with the audit committee the potential effect on the audit firm’s independence that could be caused by the firm’s performance of the service  document the firm’s discussion with the audit committee  Pre-approval requirements for permissible tax services Audit firm seeking pre-approval of the client’s audit committee would be required to  provide the audit committee with detailed documentation of the nature and the scope of the proposed tax service  discuss with the audit committee the potential effect on the audit firm’s independence that could be caused by the firm’s performance of the service  document the firm’s discussion with the audit committee

7. 7 III. Reaction of the accounting profession  First reaction of the US profession The standard could have been worse. It is probably workable. The devil is in the detail.  Comments of FEE*  Comments of the IDW** * Appendix 1 ** Appendix 2  First reaction of the US profession The standard could have been worse. It is probably workable. The devil is in the detail.  Comments of FEE*  Comments of the IDW** * Appendix 1 ** Appendix 2

8. 8 IV. Main critical areas of the PCAOB rulemaking docket (1)  Listed transactions versus anti-avoidance rules IRS listing of certain transactions that  tax promoters and advisors have developed and sold to clients, but that  do not comply with applicable IRC provisions and regulations Regular update of the list by adding and removing transactions Listed transactions are specific to the US environment  Listed transactions versus anti-avoidance rules IRS listing of certain transactions that  tax promoters and advisors have developed and sold to clients, but that  do not comply with applicable IRC provisions and regulations Regular update of the list by adding and removing transactions Listed transactions are specific to the US environment

9. 9 IV. Main critical areas of the PCAOB rulemaking docket (2) In the majority of EU Member States instead of listing application of anti-avoidance provisions, e.g. article 42 General Tax Code in Germany Proposal of FEE  restrictions on advice on US listed transactions to be limited to US transactions and not to be extended to non-US transactions In the majority of EU Member States instead of listing application of anti-avoidance provisions, e.g. article 42 General Tax Code in Germany Proposal of FEE  restrictions on advice on US listed transactions to be limited to US transactions and not to be extended to non-US transactions

10. 10 IV. Main critical areas of the PCAOB rulemaking docket (3)  Criteria for aggressive tax positions Second criterion: “a significant purpose of which is tax avoidance” to be replaced by “sole business purpose of which is tax avoidance”  would be in line with the wording of the SEC’s guidance to audit committees in its 2003 release  would reflect the main purpose of almost any tax advice: to reveal to the client the potential for tax savings  Criteria for aggressive tax positions Second criterion: “a significant purpose of which is tax avoidance” to be replaced by “sole business purpose of which is tax avoidance”  would be in line with the wording of the SEC’s guidance to audit committees in its 2003 release  would reflect the main purpose of almost any tax advice: to reveal to the client the potential for tax savings

11. 11 IV. Main critical areas of the PCAOB rulemaking docket (4)  Scope of application of the prohibition to provide tax services to senior officers Not sufficiently clear which individuals will be affected  prohibitions not to be applied to those charged with governance of the audit client  Scope of application of the prohibition to provide tax services to senior officers Not sufficiently clear which individuals will be affected  prohibitions not to be applied to those charged with governance of the audit client

12. 12 IV. Main critical areas of the PCAOB rulemaking docket (5) Approach to preclude the auditor in general from providing tax services to an audit client’s management is internationally unique  application of the framework approach would be helpful Approach to preclude the auditor in general from providing tax services to an audit client’s management is internationally unique  application of the framework approach would be helpful

13. 13 IV. Main critical areas of the PCAOB rulemaking docket (6)  The auditor’s involvement with the audit committee’s pre-approval requirements The rules  are excessively detailed and bureaucratic  reduce flexibility below the level that is necessary given the variety of services concerned  may impose disproportionate burdens on the audit firm and on audit committees to no apparent public benefit May lead to a de facto prohibition of even legally permissible tax services to audit clients  The auditor’s involvement with the audit committee’s pre-approval requirements The rules  are excessively detailed and bureaucratic  reduce flexibility below the level that is necessary given the variety of services concerned  may impose disproportionate burdens on the audit firm and on audit committees to no apparent public benefit May lead to a de facto prohibition of even legally permissible tax services to audit clients

14. 14 V. Possible impact on legislation outside the US (1)  Revised 8th EU-Directive In the ECOFIN version of December 7, 2004 no specific reference to the provisions of tax services to audit clients However:  ban on non-audit services provided to public interest audit clients in case of self review or self interest threat where appropriate to safeguard the auditor’s independence  Revised 8th EU-Directive In the ECOFIN version of December 7, 2004 no specific reference to the provisions of tax services to audit clients However:  ban on non-audit services provided to public interest audit clients in case of self review or self interest threat where appropriate to safeguard the auditor’s independence

15. 15 V. Possible impact on legislation outside the US (2)  option of the EU-Commission to adopt principles-based implementing measures concerning the cases of self-review or self- interest in which statutory audits may be carried out or not (comitology procedure)  member states’ option to set additional conditions, e.g. on the scope of activities auditors may carry out At present discussion to find a compromise between EU Commission, ECOFIN and European Parliament  option of the EU-Commission to adopt principles-based implementing measures concerning the cases of self-review or self- interest in which statutory audits may be carried out or not (comitology procedure)  member states’ option to set additional conditions, e.g. on the scope of activities auditors may carry out At present discussion to find a compromise between EU Commission, ECOFIN and European Parliament

16. 16 V. Possible impact on legislation outside the US (3)  Accounting Reform Act in Germany No general ban on tax services provided to audit clients Newly inserted provision applicable to listed companies prohibiting tax or legal services performed outside the scope of the audit function, if they – cumulatively –  extend beyond the elaboration of alternatives  impact the presentation of the financial position materially  impact the presentation of the financial position directly  Accounting Reform Act in Germany No general ban on tax services provided to audit clients Newly inserted provision applicable to listed companies prohibiting tax or legal services performed outside the scope of the audit function, if they – cumulatively –  extend beyond the elaboration of alternatives  impact the presentation of the financial position materially  impact the presentation of the financial position directly

17. 17 V. Possible impact on legislation outside the US (4) Previously considered preclusion of the auditor from representing audit clients before tax courts was dropped

18. 18 VI. IFAC’s Tax Services Review Group report on tax services and the accounting profession (1)  Purpose: To cover the independence issue when tax services are provided to audit clients To reflect the market situation  Auditor’s independence and tax services Description of the different approaches and restrictions in IFAC Code of Ethics / 8th EU- Directive / SEC-rules / some major countries Evaluation of tax services provided to audit clients  Purpose: To cover the independence issue when tax services are provided to audit clients To reflect the market situation  Auditor’s independence and tax services Description of the different approaches and restrictions in IFAC Code of Ethics / 8th EU- Directive / SEC-rules / some major countries Evaluation of tax services provided to audit clients

19. 19 VI. IFAC’s Tax Services Review Group report on tax services and the accounting profession (2)  Market situation with regard to SMEs In most countries accountants render the majority of tax services Tax services estimated on a global basis to represent more than 30% or even 50% of all work provided by accountants in public practice In countries where statutory audits of SME is required  auditors act as key advisors for non-audit services to SMEs  primary role is tax advisory service including compliance  Market situation with regard to SMEs In most countries accountants render the majority of tax services Tax services estimated on a global basis to represent more than 30% or even 50% of all work provided by accountants in public practice In countries where statutory audits of SME is required  auditors act as key advisors for non-audit services to SMEs  primary role is tax advisory service including compliance

20. 20 VI. IFAC’s Tax Services Review Group report on tax services and the accounting profession (3)  Perspectives for future work of IFAC Range of options  Tax Forum  network arrangement between IFAC and members of the tax committees  Permanent Task Force  full Tax Committee  Perspectives for future work of IFAC Range of options  Tax Forum  network arrangement between IFAC and members of the tax committees  Permanent Task Force  full Tax Committee

21. 21 VI. IFAC’s Tax Services Review Group report on tax services and the accounting profession (4)  Recommendations to IFAC Board Invitation to other IFAC committees (Ethics and Education) to discuss relevant points of the report, in particular whether the framework approach provides sufficient guidance Report to external parties Decision on the way forward  Recommendations to IFAC Board Invitation to other IFAC committees (Ethics and Education) to discuss relevant points of the report, in particular whether the framework approach provides sufficient guidance Report to external parties Decision on the way forward

22. 22 VII. Conclusions and Recommendations (1)  Extend the recommendation in the report of the Tax Services Review Group  Consider the impact on SMEs/SMPs together with IFAC SMP Permanent Task Force  Analyze final version of PCAOB docket rule to which extent it may affect the SME/SMP area indirectly  Consider preparation of a position paper on the importance of the provision of tax services to SMEs by qualified accountants  Contribute to IFAC’s future work on tax services  Extend the recommendation in the report of the Tax Services Review Group  Consider the impact on SMEs/SMPs together with IFAC SMP Permanent Task Force  Analyze final version of PCAOB docket rule to which extent it may affect the SME/SMP area indirectly  Consider preparation of a position paper on the importance of the provision of tax services to SMEs by qualified accountants  Contribute to IFAC’s future work on tax services