SEC proposes updating auditor independence rules

By Ken Tysiac

Auditor independence rules would change under a new SEC proposal designed to permit relationships in situations when independence is not substantially threatened.

If adopted, the proposed amendments to the independence rule (Rule 2-01) would:

  • Amend the definitions of affiliate of the audit client, in Rule 2-01(f)(4), and Investment Company Complex, in Rule 2-01(f)(14), to address certain affiliate relationships, including entities under common control;
  • Amend the definition of the audit and professional engagement period, specifically Rule 2-01(f)(5)(iii), to shorten the lookback period for domestic first-time filers in assessing compliance with the independence requirements;
  • Amend Rules 2-01(c)(1)(ii)(A)(1) and (E) to add certain student loans and de minimis consumer loans to the categorical exclusions from independence-impairing lending relationships;
  • Amend Rule 2-01(c)(3) to replace the reference to “substantial stockholders” in the Business Relationships Rule with the concept of beneficial owners with significant influence;
  • Replace the transition and grandfathering provision in Rule 2-01(e) with a new Rule 2-01(e) to introduce a transition framework to address inadvertent independence violations that only arise as a result of merger-and-acquisition transactions; and
  • Make certain miscellaneous updates.

The proposal is designed to permit relationships and services that trigger breaches of the current rules even though they do not pose threats to an auditor’s objectivity and impartiality, according to an SEC news release. The proposal also intends to prevent potentially time-consuming audit committee reviews of auditor independence issues that are nonsubstantive.

“In practice, the proposed amendments also would increase the number of qualified audit firms an issuer could choose from and permit audit committees and [SEC] staff to better focus on relationships that could impair an auditor’s objectivity and impartiality,” SEC Chairman Jay Clayton said in a news release.

The proposal is based on fact patterns in which the SEC staff regularly observes that the audit firm is objective and impartial and therefore does not object to the continuation of the firm’s relationship with the audit client.

Comments are due 60 days after the proposal is published in the Federal Register.

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

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