Voluntary Disclosure Agreements and Auditor Independence

Crafting a Policy that Fits the Process

John K. Cook, JD, LLM, and Kevin F. Brown, PhD, and Susan S. Lightle, PhD

The demand for CPA firms' tax services related to voluntary disclosure agreements (VDA) with state governments has grown dramatically since the promulgation of FASB Interpretation 48 (FIN 48), Accounting for Uncertainty in Income Taxes, which has led to demand for comprehensive nexus studies to determine the existence and extent of state tax exposure. VDA services typically entail a CPA firm facilitating an agreement between a state and the taxpayer (who often remains anonymous until the agreement is finalized) to determine a tax liability in states where income tax returns have not been filed previously. As with any nonattest service provided to an attest client, auditor independence must be considered prior to offering to provide the VDA services. In the past, some CPA firms may have adopted policies prohibiting them from providing VDA services to attest clients based on an assumption that such services would inherently entail negotiation, hence advocacy, thereby impairing the firm's independence.