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SEC Proposes Amendments to Auditor Independence Rules
Practical Law Legal Update w-023-4689 (Approx. 3 pages)
SEC Proposes Amendments to Auditor Independence Rules
by Practical Law Corporate & Securities
| Published on 08 Jan 2020 • USA (National/Federal) |
The SEC has proposed amendments to codify certain staff consultations and modernize the auditor independence rules.
Update: On October 16, 2020, the SEC adopted the proposed amendments to the auditor independence rules under Rule 2-01, with certain modifications. For more information, see Legal Update, SEC Adopts Amendments to Auditor Independence Rules.
On December 30, 2019, the SEC proposed rule amendments to codify certain staff consultations and modernize the auditor independence rules under Rule 2-01 of Regulation S-X.
Rule 2-01 provides the general standard for auditor independence and sets out a non-exclusive list of circumstances and relationships that preclude an auditor from being independent. The proposed rule amendments include:
- Amending the definitions of "affiliate of the audit client" under Rule 2-01(f)(4) and "Investment Company Complex" under Rule 2-01(f)(14) to:
- include materiality qualifiers in the respective common control provisions; and
- distinguish how the definition applies when an accountant is auditing a portfolio company, an investment company, or an investment adviser or sponsor.
- Amending Rule 2-01(f)(5)(iii) to shorten the "audit and professional engagement period" applicable to domestic first-time filers, so that it matches the existing look-back period for first time foreign private issuer filers. This proposed amendment would allow all issuers to look back no further than the first day of the last fiscal year before the issuer first filed, or was required to file, a registration statement with the SEC; provided that there had been full compliance with applicable independence standards in all prior periods covered by the registration statement.
- Amendments to Rule 2-01(c)(1)(ii)(A) (loan provision) and Rule 2-01(c)(1)(ii)(E) (credit card rule), including:
- adding student loans to the list of exceptions from prohibition in the loan provision;
- in the loan provision, replacing "a mortgage loan" with "mortgage loans," to clarify that the exclusion applies to more than one mortgage loan;
- in the credit card provision, changing references to "credit cards" with "consumer loans," to encompass other types of consumer financing, such as retail installment loans, cell phone installment plans, and home improvement loans that are not secured by a mortgage.
- Amending Rule 2-01(c)(3) to replace the reference to "substantial stockholders" in the business relationship rule with the concept of beneficial owners (known through reasonable inquiry) with significant influence.
- Replacing the current Rule 2-01(e) with a new transition framework to address inadvertent independence violations that only arise from merger and acquisition transactions.
- Other technical amendments and updates.
The comment period for the proposed rule amendments will be open for 60 days after publication in the Federal Register.
For more information on auditor independence standards, see Practice Note, Auditing: An Overview: Auditor Independence and Audit Oversight.