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SEC Proposes to Modernize Auditor Independence Rules

The SEC announced it is proposing amendments to codify and modernize certain aspects of its auditor independence framework.  The SEC said the  proposed amendments would update aspects of the auditor independence rule so that relationships and services that would not pose threats to an auditor’s objectivity and impartiality do not trigger non-substantive rule breaches or potentially time-consuming audit committee review of non-substantive matters.  The SEC in recent years has targeted auditors for violations of the independence rules. In June 2019, the SEC adopted amendments to the rules relating to the analysis used to determine whether an auditor is independent when the auditor has a lending relationship with certain shareholders of an audit client, known as the "loan rule." Those amendments, among other provisions, replaced the existing ten percent bright-line shareholder ownership test with a significant influence test. The June 2019 amendments also excluded affiliated funds from the definition of an audit client for a fund under audit. The SEC is now proposing several changes including: (1) to amend the definition of an affiliate of the audit client to address certain affiliate relationships in common control scenarios and the definition of investment company complex; (ii) to shorten the look-back period for U.S. first time filers in assessing compliance with the independence requirements; (iii) to add certain student loans and de minimis consumer loans to the categorical exclusions from independence-impairing lending relationships; (iv) to replace the reference to “substantial stockholders” in the business relationship rule with the concept of beneficial owners with significant influence, (v) to introduce a transition framework for merger and acquisition transactions to consider whether an auditor’s independence is impaired, and make certain other updates. According to SEC Chairman Jay Clayton: “In practice, the proposed amendments also would increase the number of qualified audit firms an issuer could choose from and permit audit committees and Commission staff to better focus on relationships that could impair an auditor’s objectivity and impartiality.” The public comment period on the proposals will remain open for 60 days following publication of the proposing release in the Federal Register.


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