The SEC adopted amendments Friday that are designed to prevent the triggering of technical auditor independence rules violations in situations that don’t necessarily impair an auditor’s judgment or impartiality.
The changes are designed to prevent auditors, their clients, and audit committees from spending time, attention, and other resources considering relationships that don’t necessarily pose a threat to independence.
“These modernized auditor independence requirements will increase investor protection by focusing audit clients, audit committees, and auditors on areas that may threaten an auditor’s objectivity and impartiality,” SEC Chairman Jay Clayton said in a news release. “They also will improve competition and audit quality by increasing the number of qualified audit firms from which an issuer can choose.”
The amendments to Rule 2-01 of Regulation S-X:
- 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 “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 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 or acquisition transactions; and
- Make certain other miscellaneous updates.
The amendments will take effect 180 days after they are published in the Federal Register. Voluntary early compliance is permitted after the amendments are published in the Federal Register, provided that the final amendments are applied in their entirety from the date of early compliance. Auditors are not permitted to retroactively apply the final amendments to relationships and services that exist before the effective date or the early compliance date, if selected by the audit firm.
— Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is the JofA’s editorial director.