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SEC Updates Auditor Independence Rules

By Stephen Barlas
January 1, 2021

The U.S. Securities & Exchange Commission (SEC) has added flexibility to auditor independence rules by adopting amendments to certain requirements in Rule 2-01 of Regulation S-X.

 

One of the objectives is to increase the pool of independent auditors available to smaller companies, such as those who may be “affiliates” of larger companies. The rule does that in part by eliminating technical independence rule violations that led to nonsubstantive rule breaches or potentially time-consuming audit committee review of nonsubstantive matters. As a result, the rule should save companies money, too.

 

“These modernized auditor independence requirements will increase investor protection by focusing audit clients, audit committees, and auditors on areas that may threaten an auditor’s objectivity and impartiality,” then-SEC Chairman Jay Clayton said when the amendments were announced. “They also will improve competition and audit quality by increasing the number of qualified audit firms from which an issuer can choose.”

 

One of the major changes is the establishment of a “dual materiality threshold” with the result that “a sister entity will be included as an affiliate of the audit client if the sister entity and the entity under audit are each material to the controlling entity.” That means affiliates will be less restricted in their choice of auditor. The amendments also allow auditors to receive loans from their clients without compromising independence; these include most automobile loans/leases, loans collateralized by insurance policies or cash, and mortgages obtained under normal market conditions.

 

Stephen Barlas has covered Washington, D.C., for trade and professional magazines since 1981 and since 1984 for Strategic Finance and its predecessor Management Accounting. You can reach him at sbarlas@verizon.net.
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