SEC Slightly Relaxes Rules on Auditor Independence

Chris Gaetano
Published Date:
Jun 19, 2019

The Securities and Exchange Commission approved an amendment that will change the analysis of determining when auditors can or cannot be considered independent when they have a creditor/debtor relationship with the audited entity. 

The SEC said that it was making this amendment in reaction to concerns from stakeholders that the current independent rules encompass relationships that do not actually impact the independence of the auditor. Under the current rules, in general, an accounting firm is not independent if it has a lending relationship with an entity having record or beneficial ownership of more than 10 percent of the equity securities of either (a) the firm’s audit client; or (b) any entity that is a controlling parent company of the audit client, a controlled subsidiary of the audit client, or an entity under common control with the audit client.    

The SEC said it has become aware of circumstances where the existing rules capture relationships that otherwise do not bear on the impartiality or objectivity of the auditor.  The amendments are intended to focus the rules on those lending relationships that reasonably may bear on external auditors’ impartiality or objectivity and, in so doing, improve the application of the loan provision for the benefit of investors while reducing compliance burdens.

Under the new rules, the analysis will focus only on beneficial ownership, rather than both record and beneficial ownership; replace the existing 10 percent bright-line shareholder ownership test with a "significant influence" test; add a "known through reasonable inquiry" standard with respect to identifying beneficial owners of the audit client’s equity securities; and exclude from the definition of audit client, for a fund under audit, any other funds that otherwise would be considered affiliates of the audit client under the rules for certain lending relationships.

“This rulemaking reflects the staff’s extensive experience and judgment, and I thank them for their continued commitment to retrospective review,” said SEC Chairman Jay Clayton.  “The amendments we are adopting today will more effectively identify debtor-creditor relationships that could impair an auditor’s objectivity and impartiality, as opposed to certain more attenuated relationships that are unlikely to pose such threats.”

These amendments will become effective 90 days after they are published in the Federal Register. 

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