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US Securities and Exchange Commission

Auditor Independence is Currently Not on SEC Rulemaking Agenda, Senior Official Says

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

· 5 minute read

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

· 5 minute read

During a speech in July, Securities and Exchange Commission Chair Gary Gensler said that the commission and the PCAOB should holistically review auditor independence rules and consider whether updates are needed because, among other issues, the board’s audit inspection continues to find problems related to independence. But at least for now, it is unclear what will come of it.

In September, SEC Acting Chief Accountant Paul Munter told Thomson Reuters that his office—the Office of the Chief Accountant (OCA)—is looking at independence rules and is also engaged with the PCAOB, which the commission oversees.

“I don’t know what, if anything, we will do yet, but we will want to coordinate as closely as possible with the PCAOB if we are going to do anything,” Munter said at the time.

Asked whether OCA has started reviewing the rules, Munter said: “I don’t know what you call review. We are certainly giving it a lot of thought in our office. We’ve started thinking about a lot of different issues that we might want to consider responding to, but no decision has been made.”

Two and a half months later, Munter’s deputy at a conference seemed to indicate that a specific rulemaking project at this juncture may not be on the table.

“It’s not currently on the actual rulemaking agenda; so, you would have to think about the priority of where that is. But the chair did direct both the SEC and the PCAOB,” said Diana Stoltzfus, a deputy chief accountant in OCA said at the 17th Annual Audit Conference hosted by the Baruch College Zicklin School of Business in New York on Nov. 29, 2022.

In response to a moderator’s question about any insights to a potential rulemaking, “we can’t say much,” she added.

However, Munter has been issuing a few statements related to auditors’ responsibilities, including those related to independence and ethics, before and after Gensler’s remarks. (See SEC Acting Chief Accountant Discusses Independence Requirements When Audit Firms Consider Restructuring in the Aug. 31, 2022, edition of Accounting & Compliance Alert.)

“Obviously making sure as firms are entering into different types of transactions that they are keeping auditor independence and ethical responsibilities top of mind,” Stoltzfus said. “As part of that, when they are entering into different types of transactions whether that might be through third-party investors or something like that, it’s going to be critically important to evaluate what entities post-transactions will be part of the accounting firm, and that goes back to who would be an associated entity, which is not defined [in the rules]. So, I think we are thinking about those types of transactions that are occurring in the marketplace.”

Another issue relates to the business and financial relationships between auditors and their audit clients.

Such relationships “have become increasingly complex as there are different technology alliances and other things, so I think that’s an area we are just continuing to make sure the auditor independence rules continue to be fit for purpose,” Stoltzfus said.

The PCAOB currently does have interim ethics and independence standards on its standard-setting agenda. But it is on the mid-term agenda.

“While the staff is working on it, we don’t anticipate board action in the next 12 months,” said PCAOB Chief Auditor Barbara Vanich, who also spoke at the conference but via zoom.

“But it is something where we do need to be coordinated because the bulk of the independence requirements are SEC rules and the PCAOB has additional rules that are very specific,” Vanich added. “So, something we look forward to coordinating with Diana and her team on.”

Still, to some extent, the PCAOB is trying to address some independence issues through its recent proposal on audit firm’s system of quality control.

The proposal, if adopted, would help improve compliance with SEC and PCAOB independence rules, Vanich said.

“It is very hard to separate independence from ethics,” she added. “And also as mentioned, we proposed as part of QC to update our existing ethics rule.”

According to the PCAOB agenda posted on its website, the objective of the mid-term project is to “consider whether PCAOB registered firms and their associated persons existing obligations should be enhanced and updated to better promote compliance through improved ethical behavior and independence.” And this is related to the board’s efforts to update interim standards—AICPA standards that the board adopted shortly after it was established by the Sarbanes-Oxley Act of 2002.

The PCAOB updated some of the AICPA’s standards, but others have remained the same.


This article originally appeared in the December 2, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.

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