The SEC has made specific changes to the independence requirements with respect to the auditor of an investment company or an investment adviser or sponsor. In some situations, the existing audit firm cannot be replaced as a practical matter because all other qualified audit firms have themselves provided services or established other relationships with portfolio companies of Fund F that triggered a breach of our independence rules. Washington D.C., Oct. 16, 2020 —. This post is based on their Skadden memorandum. Under the soon-to-be modified requirements, an auditor is not independent if specified persons within the audit firm—or their family members—maintain loans to or from an audit client. The SEC has reduced the look-back period to assess auditor independence in an IPO to one year, regardless of the period of financial statements included in the registration statement. The following examples, based, in part, on the SEC staff’s consultation experience, help to illustrate some of the concerns with the prior rules that today’s amendments address. Informed by decades of staff experience applying the auditor independence framework, the final amendments modernize the rules and more effectively focus the analysis on relationships and services that may pose threats to an auditor’s objectivity and impartiality. The previous chapter emphasized the importance of auditor independence and objectivity to internal auditing and noted the challenge to achieve true independence in internal auditing when the auditors … For example, a parent company may own operating companies, which also may own further operating companies. Company X has its own separate governance structure that is unrelated to Company Y or Z, and Company Y and Z are not material to Fund F. Amend the definitions of “affiliate of the audit client,” in Rule 2-01(f)(4), and “investment company complex,” in Rule 2-01(f)(14), to address certain affiliate relationships, including entities under common control; Amend the definition of “audit and professional engagement period,” specifically Rule 2-01(f)(5)(iii), to shorten the look-back period, for domestic first time filers in assessing compliance with the independence requirements; Amend Rule 2-01(c)(1)(ii)(A)(1) and (E) to add certain student loans and de minimis consumer loans to the categorical exclusions from independence-impairing lending relationships; Amend Rule 2-01(c)(3) to replace the reference to “substantial stockholders” in the business relationships rule with the concept of beneficial owners with significant influence; Replace the outdated transition provision in Rule 2-01(e) with a new Rule 2-01(e) to introduce a transition framework to address inadvertent independence violations that only arise as a result of a merger or acquisition transactions; and. This would in some circumstances prevent investment companies advised by related investment advisers from being swept up in the definition of “affiliate.”. In recent years, the SEC staff conducted a number of consultations in which this fact pattern, or one similar to it, was raised to the SEC staff by the registrant’s audit committee and its auditor, and the SEC staff, under such circumstances, did not object to the auditor’s and the audit committee’s conclusion that the auditor’s objectivity and impartiality would not be impaired. The SEC believes this will improve the requirements by making them more clear and less complex. Accordingly, the rule sets forth restrictions on financial, employment, and business relationships between an accountant and an audit client and restrictions on an accountant providing certain non-audit services to an audit client. The final rules, adopted on October 16, 2020, principally focus on complications that arise from auditor independence assessments with respect to affiliates of the audit client. 2. Revised SEC Independence Rules (Part 1): Affiliate of the Audit Client and Investment Company Complex The latest issue of Audit Conduct News highlights significant changes to the Securities and Exchange Commission's (SEC's) Rule … Second, such a Company shall have an audit committee that satisfies Rule 5605(c)(3). SEC independence rules also prohibit audit firms and auditors from engaging in the following financial relationships with their public audit clients: Employment relationships . The Securities and Exchange Commission (SEC) has issued final rules that significantly modify the framework that public companies and their auditors use to evaluate auditor independence, providing additional clarity for certain particularly difficult and recurring issues. Auditor independence refers to the independence of the internal auditor or of the external auditor from parties that may have a financial interest in the business being audited. The SEC has repeatedly emphasized that “maintaining the independence of auditors is crucial to the credibility of financial reporting.” As such, auditors and audit committees constantly—both before and during an engagement—must be vigilant against impairment of their independence and devote substantial resources to verifying and maintaining that independence. Independence requires … SEC Modernizes Auditor Independence Rules – October 28, 2020 by Syed Farooq. SEC Auditor Independence Rules. The final rules have also excepted most student loans obtained from a financial institution under normal conditions and prior to the person becoming covered for purposes of the requirements; clarified that more than one mortgage loan (second mortgages, home equity loans, etc.) Auditors must be independent of audit … Rule 2-01 of SEC Regulation S-X is designed to ensure that auditors are qualified and independent of their audit clients. The final amendments reflect updates based on recurring fact patterns that the Commission staff has observed over years of consultations in which certain relationships and services triggered technical independence rule violations without necessarily impairing an auditor’s objectivity and impartiality. A public company must wait at least a year before it can hire certain individuals formerly employed by its audit … An overview of the different independence rules that apply when undertaking an audit. Auditor independence refers to the independence of the external auditor. Independence Requirements. Five Threats to Auditor Independence. Auditors are not permitted to retroactively apply the final amendments to relationships and services in existence prior to the effective date or the early compliance date if selected by an audit firm. According to SEC rules, the general standard of auditor independence is that it is impaired if a reasonable, fully informed investor would conclude that the auditor is not capable of exercising … The Securities and Exchange Commission today announced that it adopted final amendments to certain auditor independence requirements in Rule 2-01 of Regulation S-X… The DOL rules apply to all employee benefit plan auditors, the AICPA rules also apply to those auditors who are members of the AICPA, and the SEC's rules apply to auditors of plans that file on Form 11-K with the SEC… are excepted; and excepted consumer loans under the same criteria as credit card balances. 1 Twitter 2 Facebook 3RSS 4YouTube (AICPA, PCAOB Standards and Related Rules, Select Rules of the Board), superseded the PCAOB’s interim standard Independence Standards Board Independence Standard No. For example, one or both of the respective auditors of two companies that agree to merge may find that they provide prohibited services to the combined company as a result of the merger. www.icai.org June/2012/1,000 (Reprint) The Institute of Chartered Accountants of India (Set up by an Act of Parliament) New Delhi ISBN : 978-81-88437-52-8 Would mitigate the need for registrants audit Committees and their auditors to seek SEC guidance! 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