November 9, 2020
Authored by: Katherine Ashton and Vicki Westerhaus
The Securities and Exchange Commission (the “SEC”) recently adopted final amendments to the auditor independence requirements set forth in Rule 2-01 of Regulation S-X. The SEC stated that the final amendments were based on recurring fact patterns that the SEC staff has observed over the years in which certain relationships and services triggered technical independence rule violations without necessarily impairing an auditor’s objectivity and impartiality. These relationships either triggered non-substantive rule breaches or required potentially time-consuming audit committee review of non-substantive matters, thereby diverting time, attention, and other resources of audit clients, auditors, and audit committees from other investor protection efforts.
In the adopting release, the SEC stated that the amendments “…maintain the bedrock principle that auditors must be independent in fact and in appearance while…more effectively focusing the independence analysis on those relationships or services that are more likely to threaten an auditor’s objectivity and impartiality.” The SEC anticipates that Rule 2-01, as amended, will make the auditor independence rules easier to apply and appropriately limit the situations in which auditors are not deemed to be independent.
The amendments include, among others:
- In connection with determining whether auditor independence exists in the context of initial public offerings, an amendment shortening the applicable look-back period to cover the immediately preceding fiscal year (rather than the period covered by the registration statement, which can be up to three years);
- In connection with identifying relationships that may preclude a finding of auditor independence, an amendment providing that a sister entity