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US Securities and Exchange Commission

SEC Plans to Simplify Auditor Independence Rules in Next Few Months

Thomson Reuters Tax & Accounting  

· 5 minute read

Thomson Reuters Tax & Accounting  

· 5 minute read

By Soyoung Ho

The SEC is planning to finalize in the next few months a rule proposal that is intended to give auditors more discretion when determining whether they are independent of their public company audit clients.

The project seems to be on a fast track schedule as the proposal in Release No. 33-10738Amendments to Rule 2-01, Qualifications of Accountants, was issued on December 30, 2019, and the commission wants to adopt it by October 2020, according to the most recent update to the agency’s rulemaking agenda.

Rulemaking normally takes more than a year from proposal to adoption. And rules that do not get broad support from all market participants—including this one—normally take longer. However, under SEC Chairman Jay Clayton’s leadership, the market regulator has largely focused on scaling back requirements to spur capital raises and lower compliance costs.

The proposal, if adopted, would simplify compliance with certain aspects of the commission’s auditor independence Rule 2-01 of Regulation S-X, which was initially adopted in 2000 and revised in 2003.

The commission said it wants to amend 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. (See SEC Proposes to Scale Back Auditor Independence Rules in the December 31, 2019, edition of Accounting & Compliance Alert.)

The agency’s effort in part comes as auditors and companies have asked for further changes while the commission staff was working on the so-called “loan rule.”

The SEC in May 2018 issued a proposal in Release No. 33-10491Auditor Independence With Respect to Certain Loans or Debtor-Creditor Relationships, and in June 2019 finalized it in Release No. 33-10648Auditor Independence With Respect to Certain Loans or Debtor-Creditor Relationships. (See Auditor Independence Rule on Lending Relationships is Revised in the June 20, 2019, edition of ACA.)

Among other things, Release No. 33-10738 seeks to amend certain definitions, including “affiliate of the audit client,” “common control,” and audit and professional engagement period.

It would 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; and address inadvertent violations that only arise as a result of merger and acquisitions (M&As).

In comment letters, audit firms and businesses said they support the proposal. But some investor protection advocates are concerned that it would erode auditor independence.

For example, Grant Thornton LLP said that the proposed amendments would allow auditors to do their independence analysis more effectively and cut down on time-consuming reviews by audit committees of non-substantive matters.

“The proposed revisions will allow the audit committee, auditor and Commission to better focus on those relationships, services and other potential independence threats that could jeopardize auditor objectivity and impartiality in the performance of an audit,” GT wrote.

However, Barbara Roper, director of investor protection with the Consumer Federation of America, said that the SEC proposed an approach that places increased reliance on auditors’ ability to exercise judgment in complying with the rules “despite strong evidence that many will not do so appropriately.”

“Audit firms’ profitability may depend on their ability to retain certain corporate clients, and their ability to retain those clients may hinge on their willingness to see things through management’s eyes,” Roper wrote.


This article originally appeared in the July 8, 2020 edition of Accounting & Compliance Alert, available on Checkpoint.

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