SEC addresses auditor independence and the Loan Provision

By Ken Tysiac

Amendments adopted by the SEC this week are designed to aid in the determination of whether an auditor's lending relationship with certain shareholders of an audit client impairs the auditor's independence.

Rule 2-01(c)(1)(ii)(A) of Regulation S-X, known as the "Loan Provision," generally states that an auditor is not independent when in a lending relationship with an audit client. But the SEC had become aware of certain lending relationships that the existing rules identified as independence threats but did not affect the impartiality or objectivity of the auditor.

The amendments are intended to focus the independence rules on lending relationships that actually may affect external auditors' impartiality or objectivity.

"The amendments we are adopting today will more effectively identify debtor-creditor relationships that could impair an auditor's objectivity and impartiality, as opposed to certain more attenuated relationships that are unlikely to pose such threats," SEC Chairman Jay Clayton said in a news release.

The new amendments:

  • Will focus the independence analysis on beneficial ownership rather than on both record and beneficial ownership.
  • Will replace the existing 10% bright-line shareholder ownership test with a significant influence test.
  • Add a "known through reasonable inquiry" standard with respect to identifying beneficial owners of the audit client's equity securities.
  • Exclude from the definition of audit client, for a fund under audit, any other funds that otherwise would be considered affiliates of the audit client under the rules for certain lending relationships.

The amendments will take effect 90 days after publication in the Federal Register.

Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is the JofA's editorial director.

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