SEC Proposes Amendments to Change Focus of Auditor Independence Rules, Create More Effective Structure

This past week, the SEC announced proposed amendments to codify certain staff consultations and modernize certain aspects of the long outdated auditor independence rules. Specifically, the proposed amendments would concentrate on relationships or services that would most likely impact the audit firm’s objectivity and ultimately impair the audit firm’s independence, as opposed to encompassing every single relationship as defined under the current independence rules.

Recap of SEC Auditor Independence Rules

Rule 2-01, the SEC auditor independence rule, was first adopted in 2000, with a few minor revisions made in 2003. This rule sets forth the various financial, employment, business and non-audit service relationships that would impair an audit firm’s independence with an audit client. The SEC acknowledges that the current auditor independence rules have remained unchanged for almost two decades. Many of these current rules place restrictions on audit firms where independence would be impaired, often when there is little to no relationship between the entity for which consultations may be provided and the end audit client for which the audit firm is conducting the audit.

Proposed Changes to Auditor Independence Rules

The most notable proposed amendments would amend:

• Rule 2-01(f)(4)(i) to incorporate a materiality requirement as it relates only to operating companies under common control, specifically focused on sister entities.
• Rule 2-01(f)(14) to further define investment company complex (ICC), which would set forth new parameters for auditors to use to identify affiliates of the audit client, specifically when the audit client is an investment company, an investment adviser or sponsor. The amended rule would include unregistered funds; distinguish that the ICC includes only sister investment companies (for those that do not share the same investment advisor or sponsor as the investment company under audit), advisors and sponsors that are material to the controlling entity; include sister investment companies that share the same investment advisor or sponsor as the investment company under audit, with no materiality provision; and incorporate “significant influence” provision.
• Rule 2-01(c) to allow for additional exceptions under the loan provisions, including a student loan exception; clarification on the definition of mortgage loans; and revision of the credit card rule to consumer loans. Additionally, clarifications are proposed to replace the term “substantial stockholders” with “beneficial owners (known through reasonable inquiry) of the audit client’s equity securities where such beneficial owner has significant influence over the audit client” as well as the term “audit client” when referring to persons associated with the audit client in a decision-making capacity.

While there may be some significant challenges both for audit firms and audit clients to consider with the approval of these amendments, there are some benefits for audit clients — such as allowing for some additional flexibility, creating more choices for audit clients when selecting a qualified auditor while still ensuring no threat to an auditor’s objectivity.

While these rules are only proposed, the public has 60 days from the publication of the proposing release in the Federal Register to comment.

Read the full proposed amendments to Rule 2-01.

Contact Lindsay Selick at lselick@cohencpa.com or a member of your service team to discuss this topic further.

Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.