Article Published: Oct 11, 2021 // Updated: Mar 02, 2022 In June 2021, the Securities and Exchange Commission (SEC) made amendments effective for certain rules regarding auditor independence requirements (known as Rule 2-01 of Regulation S-X).[1] The intention behind these amendments was to modernize the SEC's rules governing auditor independence and more effectively focus the analysis of independence on relationships or services that may threaten an auditor's objectivity and impartiality as well as reduce the effect that the independence rules can have on a company's ability to select an auditor. Although several substantive amendments were made to the auditor independence requirements, what is known as the "general standard" (i.e., Rule 2-01(b)) did not change as a result of these amendments. For instance, the introductory text to Rule 2-01 indicates, in evaluating the general standard, the SEC will consider whether a relationship or service:
When applying these amended standards, companies must still keep in mind the general standard, which further indicates that "an accountant is not considered to be independent with respect to an audit client, if the accountant is not, or a reasonable investor with knowledge of all relevant facts and circumstances would conclude that the accountant is not capable of exercising objective and impartial judgment on all issues encompassed within the accountant's engagement."[2] Therefore, even in circumstances when a service or relationship is not explicitly prohibited by the independence rules under Rule 2-01, the general standard requires auditors, audit committee members and management to evaluate a service or relationship from the perspective of a reasonable investor and determine whether there is a real or perceived impact on the auditor's objectivity and impartiality. The following provides an overview of key changes to the related SEC rules as a result of the amendments:
Investment Company Complex Definition
Overall, the adoption of these amendments is intended to have many benefits including, but not limited to:
While many may generally think that changes coming from the SEC only impact public companies, private companies and private equity companies in particular should also evaluate the impact of these changes if their auditors are required to follow SEC independence standards. The new rules may allow greater use of the same audit and accounting firm to provide services to sister companies that don't meet the materiality threshold under the new rules. Further, private companies looking to enter an IPO may run into less roadblocks as it relates to auditor independence due to the shorter lookback period.
Finally, when applying these amendments, it is important to exercise extreme caution and not consider the amendment in isolation, but instead ensure you are considering the amendments through the lens of the general standard. The situations for which these amendments apply can be extremely limited and facts and circumstances based. To understand how these changes may impact your company, we encourage management to reach out to your auditors to discuss the services provided and whether these amendments may impact current or future service offerings. DHG is ready to answer any questions you may have – contact us today. Sources [1] SEC Final Rule release 33-10876 Qualification of Accountants. [2] Rule 2-01(b). [3] Rule 2-01(f)(4). [4] The SEC's definition of a "covered person" in the firm, with respect to an audit client (or its affiliates) includes (1) individuals on the "audit engagement team," (2) personnel in the "chain of command" over members of the audit engagement team or concerning the conduct of the audit, (3) any professionals who provide any professional service to an audit client (or its affiliates), and (4) any other partner, principal, or shareholder from an "office" of the accounting firm that participates in a significant portion of the audit.
Related FORsightsWhich of the following individuals are considered covered persons with respect to an audit client?A “covered person” includes members of the audit engagement team and those in the chain of command, as well as any other partner, principal, shareholder or managerial employee of the audit firm who has provided 10 or more hours of nonaudit services to the audit client for the current accounting period or on a recurring ...
Can a covered person hold an insurance policy with an IESBA restricted audit client?Only if the individual does not make changes to the terms of the contract There are no restrictions on covered persons holding insurance policies with IESBA restricted audit clients Only if the insurance policy was issued prior to.
Which of the following non audit services are we prohibited from providing to SEC restricted entity?Specific Prohibited Non-audit Services
The auditor is prohibited from providing the following non-audit services to an audit client including its affiliates: Bookkeeping. Financial information systems design and implementation. Appraisal or valuation services, fairness opinions, or contribution-in-kind reports.
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