January 30, 2003
Expert Report to S.E.C. Supports Ruling on Controversial Tax Services

William Kinney Also See AICPA Names Kinney Accounting Professor of the Year for 2002 William Kinney's Website

AUSTIN, TX (Jan. 30) - William Kinney, an audit expert who recently submitted an influential report to the S.E.C. on conflicts of interest at major accounting firms, supports the commission's ruling on Wednesday allowing accountants to continue performing tax services for audit clients -- if approved by the client’s independent audit committee.

The ruling, an apparent upset for lawyers, may mark a turning point in a feud between lawyers and accountants over who can offer tax services. Both sides compete to perform such services, which in 2001 constituted a $7.1 billion market for Big Five accounting firms alone, according to the accounting industry.

For months lawyers have attempted to persuade the S.E.C. to restrict accountants from performing certain tax services that fall under a regulatory gray zone in the Sarbanes-Oxley Act. Lawyers maintain that audit firms inevitably compromise their objectivity when they performed non-audit tax services for audit clients.

To assess the issue, Kinney, along with professors Zoe-Vonna Palmrose of Southern California and Susan Scholz of Kansas, studied restatements of earnings at major companies from 1995 through 2000. (The S.E.C. uses restatements as a measure of failed financial reporting.) Their research shows that audit firms that performed substantial tax services for clients were actually less likely, on average, to issue earnings restatements.

Kinney concluded, as he wrote to the S.E.C. on Jan. 7, “that it would be premature for the Commission to restrict tax services by a registrant's audit firm.” Such restrictions, he wrote, might actually hinder efforts to protect investors from potential restatements, according to their preliminary data.

The research, sponsored by the American Accounting Association, has not been concluded, but the summary submitted to the S.E.C. on Jan. 7 is available as a matter of public record.

Kinney can be reached for comment at 512-471-3632, via email at william.kinney@mccombs.utexas.edu, or through the McCombs School’s public affairs office at 512-232-7510, media.relations@mccombs.utexas.edu.

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