When the SEC led by then-Chairman Jay Clayton proposed and adopted revisions to its auditor independence rule in Rule 2-01 of Regulation S-X, a main reason had to do with codification of “certain staff consultations” related to the assessment of whether an accountant is independent of its public company audit client.
Consultation with the SEC’s Office of the Chief Accountant (OCA) can be time-consuming.
The SEC said that the rule addresses practical challenges in complying with auditor independence requirements delineated in Rule 2-01, which was initially adopted in 2000 and revised in 2003.
The market regulator said that the rule is borne out of decades of staff experience in consulting with auditors about independence matters. The rule is intended to put the focus and analysis of relationships that may pose threats to an auditor’s impartiality.
The commission said management, auditors, and audit committees will not have to waste time on non-substantive rule breaches.
The SEC in a split vote adopted the rules over the objections of investor protection advocates who argued that the changes would give more discretion to auditors in their evaluations of independence and reduce transparency, putting investors at unnecessary risk.
The final rule is in Release No. 33-10876, Qualifications of Accountants, issued in October 2020.
During Clayton’s tenure, the SEC largely pursued a more business-friendly and deregulatory rulemaking agenda.
Now, a year after the rule’s adoption, there does not seem to be—at least in the first-year implementation of the changes—a decrease in consultation with OCA on independence matters. It is hard to tell whether over time, there will be a downward trend in the number of consultations.
Speaking at a recent conference, SEC’s Acting Chief Accountant Paul Munter said since implementation, there has been a “big” increase in consultation requests. It also comes as there has been an uptick in companies tapping into the public markets to fund their operations, such as through special purpose acquisition company (SPAC) deals.
Release No. 33-10876 changed certain definitions: “affiliate of the audit client” and “investment company complex” to address certain affiliate relationships, including entities under common control; and “audit and professional engagement period” to shorten the look-back period, for domestic first-time filers in assessing compliance with the independence requirements.
The new rule “means that more of those periods that are subject to the general standard of Rule 2-01 as opposed to the more prescriptive aspects of 2-01,” Munter said at the annual Conference on Banks and Savings Institutions hosted by the AICPA and CIMA on September 20, 2021.
“We changed the definition of the affiliate which resulted in more judgment being brought to bear as to whether an entity is or is not an affiliate,” Munter said. “So, because of those two things—since we are oftentimes dealing with judgment about whether a sister entity or the like is an affiliate under our definition, and because we are often times dealing with applications of general standards, we found a big increase in the consultations coming into the office with respect to independence matters.”
Munter then pointed to the introductory note of Rule 2-01 that says, “The rule does not purport to, and the Commission could not, consider all circumstances that raise independence concerns, and these are subject to the general standard in §210.2-01(b).”
“And what 2-01(b) says is that we consider all the facts and circumstances, and we are trying to understand whether a business relationship or a service creates one of the following problems: one, does it create a mutual conflicts of interest between the accountant and the audit client. Does it place the accountant in the position of auditing his or her own work?” Munter said.
“Does it result in the accountant acting as management or as an employee of the audit client? Or does it place the accountant in the position of being an advocate for the audit client?” he added. “Any of those would be inconsistent with the auditor’s requirement to be independent in both fact and appearance.”
In addition, Munter highlighted that over the last several years, audit firms have entered into increasingly more complex business and services arrangements with non-audit clients.
“Now, it’s not for us to tell an audit firm what kind of arrangements it should get involved in with a non-audit client, but as the complexity and scope of those arrangements increase and as we are in the environment of a lot of acquisitions going on, we see a lot of circumstances where an arrangement of an audit firm is entered into with a non-audit client can become a problem as those capital transactions occur at some point in the future.”
This article originally appeared in the October 01, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.
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