SEC Office of the Chief Accountant - PowerPoint Presentation

1. SEC Office of the Chief AccountantAuditor Independence Update IESBA CAG PresentationMarch 10, 2021

2. DisclaimerThe U.S. Securities and Exchange Commission (the “SEC” or the “Commission”) disclaims responsibility for any private publication or statement of any SEC employee or Commissioner.  This presentation expresses the author's views and does not necessarily reflect those of the Commission, the Commissioners, or other members of the staff.2

3. Presenters 3Jenifer Minke-GirardJasdeep Mangat Vassilios KarapanosMatt Hodder

4. Independence Consultations Process 4

5. The Independence Consultations Process Objectives of OCA’s engagement in Auditor Independence consultations include:Enhancing investor protection, and Facilitating capital formation OCA may be requested to evaluate auditor independence matters in two manners: Formal Independence Consultations and Informal Independence Consultations 5

6. The Independence Consultations Process Sources of Consultations: Audit firms, including individual proprietorsIssuersRegistered Investment AdvisorsBrokers and DealersPCAOB staff Other regulators such as FDIC SEC divisions and offices (Divisions of: Enforcement; Corporation Finance; Investment Management, Trading and Markets; Examinations)OCA staff also consults with these divisions and offices as appropriate 6

7. The Independence Consultations Process Nature of Consultations: Informal ConsultationsQuestions generally relate to a specific provision of the SEC independence rulesFrequently received by OCA via e-mail or phoneThe requestor receives informal OCA staff views on narrow interpretive questions, generally those that can be answered readily upon reference to established auditor independence rules and guidance. 7

8. The Independence Consultations Process Nature of Consultations: Formal ConsultationsDocumented submission of external party’s facts and circumstancesRequest for the staff’s view OCA staff will consider the conclusions of the audit committee, company management and the audit firm with respect to the audit firm’s objectivity and impartiality 8

9. Auditor IndependenceOverview of Rules and Recent Amendments9

10. Auditor Independence: Overview of Rules and Recent AmendmentsAgendaOverview of SEC Independence RulesBackgroundRule 2-01October 2020 Amendments to Rule 2-01Other GuidanceOverview of PCAOB Independence RulesBackgroundPCAOB Rules 3520-3526January 2021 Conforming Amendments 10

11. Overview of SEC Independence RulesBackgroundSince the Commission's creation in 1934, it has consistently emphasized the need for auditors to remain independent.The Commission's requirements are set forth in Rule 2-01 of Regulation S-X (“Rule 2-01”).Additional guidance can be found in staff FAQs and other materials.Significant updates to Rule 2-01 in:2000 [Link to Rule Release]2003 [Link to Rule Release]2019 [Link to Rule Release]2020 [Link to Rule Release]Applicable to 1933 & 1934 Act filers, registered investment companies, registered investment advisers, unregistered funds, brokers and dealers11

12. Overview of SEC Independence RulesRule 2-01, Qualifications of accountants.Designed to ensure that auditors are qualified and independent of their audit clients in fact and appearance.Rule 2-01 includes:Principles-based considerations in Rule 2-01(b) and Preliminary Note 2Specific prohibitions in Rule 2-01(c)Definitions and other technical guidance12

13. Overview of SEC Independence RulesRule 2-01(b)Principles-based rule referred to as the “General Standard”States that the Commission will not recognize an accountant as independent if the accountant is not, or a “reasonable investor with knowledge of all relevant facts and circumstances” would conclude that the accountant is not, capable of exercising objective and impartial judgment 13

14. Overview of SEC Independence RulesRule 2-01, Introductory NoteRead in conjunction with Rule 2-01(b)Outlines four general principles indicative of a relationship or the provision of a service that would impair independence:Creates a mutual or conflicting interest between the accountant and the audit client;Places the accountant in the position of auditing his or her own work;Results in the accountant acting as management or an employee of the audit client; orPlaces the accountant in a position of being an advocate for the audit client.14

15. Overview of SEC Independence RulesRule 2-01(c)Contains a non-exclusive listing of circumstances that would impair independence, including:Financial RelationshipsEmployment RelationshipsBusiness RelationshipsNon-Audit Services [Rule 2-01(c)(4)]Contingent FeesPartner RotationAudit Committee Administration of the EngagementCompensation 15

16. Rule 2-01(c)(4)Prohibited non-audit services include:BookkeepingFinancial information systems design and implementationAppraisal and valuation services, fairness opinions, or contribution-in-kind reportsActuarial servicesInternal audit outsourcing servicesManagement functionsHuman resourcesBroker-dealer, investment adviser, or investment banking servicesLegal servicesExpert services unrelated to the auditOverview of SEC Independence Rules 16

17. October 2020 Amendments to SEC Independence RulesOverviewAmended the definitions of “affiliate of the audit client” and “investment company complex” to address certain affiliate relationships, including entities under common control;Amended the definition of “audit and professional engagement period” to shorten the look-back period for domestic first time filers in assessing compliance with the independence requirements;Amended Rule 2-01(c) to add certain student loans and de minimis consumer loans to the categorical exclusions from independence-impairing lending relationships;Replaced the reference to “substantial stockholders” in the business relationships rule with the concept of beneficial owners with significant influence (“BOSI”);Introduced transition provisions for mergers and acquisitions involving audit clients;Made certain other miscellaneous updates. 17

18. October 2020 Amendments to SEC Independence RulesHighlightsThe auditor independence lookback period is now one year, which is consistent with the existing look-back period for Foreign Private Issuers.The general standard in Rule 2-01(b) continues to apply to the back periodsThere is a new transition framework related to merger and acquisition transactions.Effective DateThe amendments were published in the Federal Register on December 11, 2020.The effective date is June 9, 2021, with early adoption permitted on an audit firm-wide basis if the rule amendments are adopted in their entirety. 18

19. Overview of PCAOB Independence RulesBackgroundCongress has provided both the SEC and the PCAOB with authority to establish auditor independence standards. The Sarbanes-Oxley Act of 2002 (as amended by the JOBS Act of 2012) specifically authorizes the PCAOB to establish independence standards and rules to be used by registered public accounting firms in the preparation and issuance of audit reports for Issuers and Broker Dealers.The PCAOB’s independence rules work in concert with the SEC’s independence rules but do impose certain incremental independence obligations on registered public accounting firms.(e.g. additional prohibitions on tax services for persons in financial reporting oversight roles at issuer audit clients) 19

20. Overview of PCAOB Independence RulesPCAOB Rules 3520-3526Rule 3520 - Auditor IndependenceRule 3521 - Contingent FeesRule 3522 - Tax TransactionsRule 3523 - Tax Services for Persons in Financial Reporting Oversight RolesRule 3524 - Audit Committee Pre-approval of Certain Tax ServicesRule 3525 - Audit Committee Pre-approval of Non-audit Services Related to ICFRRule 3526 - Communication with Audit Committees Concerning Independence 20

21. PCAOB Independence Rules – January 2021 Conforming AmendmentsIn late 2020, the PCAOB made targeted conforming amendments to their independence rules to:Avoid differences between the SEC and PCAOB independence rules; Avoid duplicative requirements; andProvide greater regulatory certainty.Approved by the SEC in January 2021Effective DateJune 9, 2021, with early adoption permitted on a firm-wide basis if the rule amendments are adopted in their entirety.Same effective date as the SEC Amendments from October 2020 21

22. Questions Questions? 22