By Corie Long
On October 16, 2020, the SEC issued a final rule adopting amendments to update certain auditor independence requirements. These amendments are intended to more effectively and efficiently focus the independence analysis on those relationships or services that are more likely to pose threats to an auditor’s objectivity and impartiality. As a result, the SEC expects the pool of auditors available to registrants to expand.
Amendments to auditor independence rules include the following:
- A one-year look-back period for all first-time domestic and foreign filers within the audit and professional engagement period;
- Transition framework to address auditor independence-impairment service or relationship created by merger and acquisition transactions;
- Updated definitions of “affiliate of the audit client” and “investment company complex”, which include a new dual materiality threshold;
- New exemptions for certain student loans and de minimis consumer loans as well as updated language to clarify more than one mortgage loan is permitted on a primary residence; and
- Clarification of business relationship rule to include the concept of “beneficial owners (known through reasonable inquiry) of the audit client’s equity securities, where such beneficial owner has significant influence over the entity under audit.”
The changes will be effective 180 days after publication in the Federal Register. Although voluntary early compliance is permitted, auditors cannot 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.
The SEC believes the final amendments will benefit audit firms, audit clients, and investors by reducing compliance costs for audit firms and their clients and overall compliance burdens without significantly diminishing investor protections. By reducing the number of minor independence conflicts, clients may be able to choose between an increased number of eligible audit firms with expertise that better aligns with the needs of the audit engagement, leading to an improvement in audit and financial statement quality. Similarly, investors will benefit from any resulting improvement in financial reporting quality.
For further questions regarding the above summary, please contact Elberta Nizzoli at email@example.com