SEC Proposes Changes to Auditor Independence Rules

May 18, 2018

To address circumstances when auditors borrow funds or issue debt to accrue working capital, the Securities and Exchange Commission (“SEC”) has proposed updates to its auditor independence rules for lending relationships. The proposed amendments include updating Rule 2-01 of Regulation S-X to replace the current 10 percent bright-line shareholder ownership test with what the SEC calls a “significant influence” test and introducing a “known through reasonable inquiry” standard for recognizing the beneficiaries of the audit client’s equity securities. The SEC also wants to change its definition of “audit client” to exclude funds that are otherwise deemed affiliates of the audit client.

SEC chief accountant Wesley Bricker stated that the proposed changes aim to improve the accuracy of identifying lending relationships with equity owners of audit clients that can hinder the auditor’s impartiality. Bricker added that threats to auditor independence could impact any industry, but the risks mostly occur in asset management. He also said that the SEC wants to enhance the criteria to make it easier for auditors and clients to comply with the requirements of Rule 2-01.

Comments on the proposed amendments, which were issued as Release No. 33-10491, Auditor Independence With Respect to Certain Loans or Debtor-Creditor Relationships, are due 60 days after appearing in the Federal Register.