SEC amends certain auditor independence requirements


Authored by RSM US LLP

The SEC recently issued Final Rule 33-10876, Qualifications of Accountants, to update certain of its auditor independence requirements. The amendments are intended to more effectively focus the independence analysis on relationships and services that are more likely to pose threats to an auditor’s objectivity and impartiality. The amendments primarily focus on fact patterns in which relationships and services would not impair an auditor’s objectivity and impartiality but under the extant rule would have triggered technical, non-substantive rule breaches. Among other updates, upon its effective date, the SEC’s Final Rule will:

  • Amend the definitions of “affiliate of the audit client” and “investment company complex” to address certain affiliate relationships, including entities under common control.
  • Incorporate a dual materiality threshold in the amended common control provision such that, if either the sister entity or the entity under audit is not material to the controlling entity, then the sister entity will not be deemed an affiliate of the audit client pursuant to SEC Regulation S-X Rule 2-01(f)(4)(ii). However, the auditor’s non-audit services to and relationships with sister entities that are no longer deemed affiliates as a result of applying the dual materiality threshold will continue to be subject to the principles set forth in Rule 2-01(b), and as such, knowledge of services to and relationships with such non-affiliate sister entities will be needed to sufficiently consider the general standard.
  • Amend the definition of the “audit and professional engagement period” to shorten the look-back period to the most recently completed fiscal year for domestic first-time filers in assessing compliance with the independence requirements to be consistent with the definition that applies to foreign private issuers.
  • Add certain student loans and de minimis consumer loans to the categorical exclusions from independence-impairing lending relationships.
  • Replace the reference to “substantial stockholders” in the business relationship rule with the concept of beneficial owners with significant influence.
  • Provide a transition framework for corporate merger and acquisition transactions to address inadvertent independence violations that only arise as a result of a merger or acquisition transaction so the auditor and its audit client can transition out of such prohibited services and relationships in an orderly manner

The Final Rule is effective 180 days after publication in the Federal Register. Voluntary early compliance is permitted after the amendments are published in the Federal Register in advance of the effective date 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 Rule to relationships or services in existence prior to the effective date or the early compliance date if selected by an audit firm.