US to relax rules that govern auditors' independence

Chris Hamblin

4 January 2020

In 2017 President Trump picked Jay Clayton, a lawyer who had represented large Wall Street firms, as head of the Securities and Exchange Commission. As he did so he proclaimed that "we need to undo many regulations which have stifled investment in American businesses." Clayton is now proposing to change the rules to ensure - in his somewhat opaque words - that "relationships and services that do not pose threats to an auditor’s objectivity and impartiality are not held to engender non-substantive rule breaches or reviews of non-substantive matters by audit committees."

He added: “The proposed amendments 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 will continue for 60 days after the Government publishes the 'proposing release' in the Federal Register, which serves as its gazette.

The proposals are designed to:

redefine the phrases "affiliate of the audit client," which is found in Rule 2-01(f)(4), and "Investment Company Complex," which is in Rule 2-01(f)(14), to deal with certain affiliate relationships, including entities under common control;
change the "audit and professional engagement period" mentioned in Rule 2-01(f)(5)(iii) to shorten the look-back period for domestic "first-time filers" in assessing compliance with the independence requirements;
amend Rule 2-01(c)(1)(ii)(A)(1) and (E) to add certain student loans and de minimis consumer loans to the categorical exclusions from independence-impairing lending relationships;
amend Rule 2-01(c)(3) to replace the reference to “substantial stockholders” in the business relationship rule with the concept of beneficial owners with significant influence;
replace the transition and grandfathering provision in Rule 2-01(e) with a new Rule 2-01(e) to deal with "inadvertent independence violations" that only arise as a result of merger and acquisition transactions.

This is a non-exhaustive list. Rule 2-01 is designed to ensure that auditors are qualified and independent of their audit clients both in fact and in appearance. As the proposal indicates, "compliance costs from independence monitoring arise even where the relationships being monitored are not likely to threaten the auditor’s objectivity and impartiality."