SEC amends rules on determining auditor independence


The Securities and Exchange Commission (SEC) has amended rules on determining whether an auditor is independent when he or she has a lending relationship with certain shareholders of an audit client.

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The existing rule states an auditor is not independent if that auditor is in a lending relationship with its audit client.  However, the SEC has discovered that in certain circumstances, the existing Loan Provision may not have been functioning as it was intended.

The amendments look to focus the rules on those lending relationships that reasonably may bear on external auditors’ impartiality or objectivity. To do this, the amendments improve the application of the Loan Provision for the benefit of investors while reducing compliance burdens.

Specifically, they focus on beneficial ownership rather than on both record and beneficial ownership; replace the existing ten percent bright-line shareholder ownership test with a significant influence test; add a known through reasonable inquiry standard for identifying beneficial owners of the audit client’s equity securities.  Further, they exclude from the definition of audit client, for a fund under audit, any other funds that otherwise would be considered affiliates of the audit client under the rules for certain lending relationships.

“This rulemaking reflects the staff’s extensive experience and judgment, and I thank them for their continued commitment to retrospective review,” SEC Chairman Jay Clayton said.  “The amendments we are adopting today will more effectively identify debtor-creditor relationships that could impair an auditor’s objectivity and impartiality, as opposed to certain more attenuated relationships that are unlikely to pose such threats.”

These amendments become effective 90 days after they are published in the Federal Register.

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