SEC warns audit firms. Bloomberg News reports a recent SEC warning to accounting firms that they cannot provide both savings based tax consulting services (those with a contingent fee) and financial statement audit services to the same client. The two services seem to pose a confict of interest. This type of tax work rewards the audit firm for client taxes saved. Financial auditors could be tempted to overlook financial statement irregularities that lower client taxes, thereby increasing tax consulting fees.

SEC Chief Accountant Donald Nicolaisen said he ordered the seven biggest firms in a private meeting last week to fully disclose any such arrangements to the company audit committees that oversee their work. He also warned the firms they may face SEC enforcement investigations over the contingency fees, payments that are based on a percentage of tax savings.

In January 2003, the SEC passed rules prohibiting accounting firms from performing a number of consulting services for audit clients. The rules let firms provide tax advice to audit clients as long as it is pre-approved by the audit committee. Firms can enter into contingency fee agreements with non-audit clients for tax work.