SEC proposes to relax long-standing auditor independence rules

The Securities and Exchange Commission is proposing a set of amendments to the auditor independence rules that have been in place since the early 2000s, which gives companies more leeway to determine conflicts of interest and shortens the period of hindsight. for clients who plan to go public.

Auditor independence rules were first adopted in 2000, then revised in 2003 after a wave of accounting and auditing scandals involving companies like Enron and WorldCom. Under the rules, an auditor must generally be independent throughout the engagement period and the period covered by the audited financial statements, but after the relationship ends, there is no continuing requirement for the auditor to remain independent.

The SEC gives the example of an audit firm that has an Atlanta-based audit partner who continues to pay off his student loans taken out to attend college before starting a career in the audit firm. If another audit partner in Atlanta audits the lender who provided the student loan, under current rules, the student loan from the audit partner who is not part of the audit would still lead to a breach of the loan. independence for the lender’s audit mission.

The proposed changes would update several aspects of the old auditor independence rules and analyzes so that relationships and services that would not generally pose a threat to an auditor’s objectivity and impartiality do not trigger violations of auditors. non-material rules or lengthy reviews by the audit committee of non-substantive issues.

“The proposed changes are based on years of experience of Commission staff in applying our set of auditor independence rules and respond to recent and longer-term feedback received from a wide range of stakeholders. market, ”SEC Chairman Jay Clayton (pictured) said in a statement Monday. ‘The proposal is in line with the Commission’s long-held view that an audit by an objective, impartial and competent professional improves both investor protection and market integrity and, in turn, facilitates the capital formation. In practice, the proposed changes would also increase the number of qualified audit firms from which an issuer could choose and allow audit committees and Commission staff to better focus on relationships that could undermine objectivity. and the impartiality of an auditor.

The proposed changes, if adopted, would modify the definitions of the audit client’s affiliate to reflect certain relationships with affiliates, including entities under common control. They would also modify the definition of the period of audit and professional engagement in order to shorten the period of retrospection, for first-time national applicants in the assessment of compliance with independence requirements; and amend the rules to add certain student loans and de minimis consumer loans to the categorical exclusions of prejudicial lending relationships. They would also amend a rule to replace the reference to “significant shareholders” in the rule of business relations with the notion of beneficial owners exercising significant influence. In addition, they would replace the transitional and grandfather provision of Rule 2-01 (e) with a new rule designed to introduce a transitional framework to deal with unintentional violations of independence that only arise as a result of merger and acquisition transactions, as well as other miscellaneous updates. The changes will be open for a 60-day comment period after the proposal is posted in the Federal Register.

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