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US Securities and Exchange Commission

SEC Approves PCAOB’s Revised Auditor Independence Rules

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

· 5 minute read

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

· 5 minute read

The SEC approved the PCAOB’s revised auditor independence rules intended to align with commission rules. These rules were backed by accounting firms, but investor protection advocates had opposed them, fearing erosion of auditor independence as a result and putting investors at a greater risk.

As part of its oversight activities, the commission must sign off on the PCAOB’s major decisions, including changes to its standards and annual budget.

“This order approves the Proposed Rules, which we find to be consistent with the requirements of the Sarbanes-Oxley Act and the securities laws and necessary or appropriate in the public interest or for the protection of investors,” The SEC said in Release No. 34-90930, Order Granting Approval of Amendments to PCAOB Interim Independence Standards and PCAOB Rules to Align with Amendments to Rule 2-01 of Regulation S-X, published on January 14, 2021.

Sarbanes-Oxley Act of 2002 created the PCAOB to try to prevent a repeat of accounting scandals that toppled companies like Enron and WorldCom.

The SEC’s order approves PCAOB Release No. 2020-003Amendments to PCAOB Interim Independence Standards and PCAOB Rules to Align with Amendments to Rule 2-01 of Regulation S-X, published in November 2020.

The board said it was adopting changes to its auditor independence rules so they better align with the SEC’s recent revisions to Rule 2-01Qualifications of Accountants, in Regulation S-X. (See PCAOB Revises Auditor Independence Rules to Align with SEC’s Rule Changes in the November 20, 2020, edition of Accounting & Compliance Alert.)

Revised Rules

In October, the SEC issued Release No. 33-10876Qualifications of Accountants, which simplified compliance with auditor independence Rule 2-01. It gave auditors more discretion when determining whether they are independent of their public company audit clients. The rule was issued as then-SEC Chairman Jay Clayton prioritized cutting requirements during his tenure.

The agency said it amended the auditor independence rule so that auditor and client relationships and services that would not threaten an auditor’s objectivity do not trigger compliance violations. Auditors and audit committees will not have to spend time analyzing non-substantive rule breaches.

Both SEC and PCAOB rules become effective on June 9, 2021. The commission said auditors can comply early provided that the changes are applied in their entirety.

Comment Letters

Audit firms, which had pushed for the rule changes at the SEC, said in comment letters to the commission that they want the PCAOB revisions to become effective as well.

“Rule 2-01 of Regulation S-X improve the relevance of the Commission’s auditor independence standards in light of existing market conditions by more effectively focusing the independence analysis on those relationships or services that are more likely to threaten an auditor’s objectivity and impartiality,” Ernst & Young LLP wrote. “The PCAOB’s proposed conforming amendments provide greater regulatory clarity that enhance both investor protection and market integrity, which, in turn, will facilitate capital formation.”

However, investor protection advocates disagreed. A coalition of several investor groups spearheaded by Barbara Roper, director of investor protection of Consumer Federation of America, wrote in a comment letter that “like the SEC rules on which they are based, these changes would weaken auditor independence standards, further undermining investors’ faith in the reliability of financial disclosures and putting the integrity of our capital markets at risk.”

Democrats on the commission and the board seemed to agree with investors.

SEC Commissioners Allison Herren Lee and Caroline Crenshaw voted against the commission rules. PCAOB member Jay Brown voted no on the board’s rules.

Lee, who is married to Brown, seems to have recused herself from voting on the PCAOB’s rules.

In the meantime, Brown has announced that he will be leaving the board this month. He did not say why he has decided to step down at this juncture when his term does not expire until October. But without Lee’s vote, the commission’s decision on PCAOB matters will be deadlocked. And whatever the PCAOB sends its way, it will automatically go into effect if the SEC does not act to approve or disapprove the board’s rule within a specified time frame.


This article originally appeared in the January 19, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.

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