SEC Updates Auditor Independence Rules

The SEC adopted final amendments to certain auditor independence requirements in Rule 2-01 of Regulation S-X.  The SEC said 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 amendments reflect updates based on recurring fact patterns that SEC 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, the SEC said.  These relationships either triggered non-substantive rule breaches or required potentially time-consuming audit committee review of non-substantive matters, thereby diverting time, attention, and other resources of audit clients, auditors, and audit committees from other investor protection efforts. The final amendments result in auditor independence requirements that will be used to evaluate specific relationships and services, with a focus on protecting investors against threats to the objectivity and impartiality of auditors. Among other things the final amendments will:

  • Amend the definitions of “affiliate of the audit client,” and “investment company complex,” to address certain affiliate relationships, including entities under common control;
  • Amend the definition of “audit and professional engagement period,” to shorten the look-back period, for domestic first-time filers in assessing compliance with the independence requirements;
  • 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 relationships rule with the concept of beneficial owners with significant influence;
  • Introduce a transition framework to address inadvertent independence violations that only arise as a result of a merger or acquisition transactions; and
  • Make certain other miscellaneous updates.