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NEW SEC AUDITOR INDEPENDENCE REQUIREMENTS. Financial Executives International Janet Luallen Director - Technical Activities. What does it cover?. Financial Relationships Employment Relationships Business Relationships Scope of Services.

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new sec auditor independence requirements

NEW SEC AUDITOR INDEPENDENCE REQUIREMENTS

Financial Executives International

Janet Luallen

Director - Technical Activities

what does it cover
What does it cover?
  • Financial Relationships
  • Employment Relationships
  • Business Relationships
  • Scope of Services
slide3
The Auditor Independence Rule provides general guidance only. The SEC’s Office of the Chief Accountant should be consulted before entering relationships that are not described
financial relationships
Financial Relationships
  • Applies to investments by audit firm employees and their family members
  • Limits restrictions to those who work on the audit or can influence the audit
auditors are not independent if the auditors or auditors family members have
Auditors are not independent if the auditors or auditors’ family members have:
  • Direct investments i.e., stocks, bonds notes, options, or other securities, in the audit client
  • Beneficial ownership of more than 5% of the equity or control
  • Control of an audit client
  • The position of trustee or executor with authority to make decisions for a trust or estate with the securities of the audit client
continued
...continued
  • Material indirect investments in the audit client
  • Direct or material indirect investments in:
    • an entity in which an audit client has an investment, where the investment is material to the audit client and gives it the ability to exercise significant influence over that entity
    • an entity that has an investment in an audit client, where the investment is material and where that entity has the ability to exercise significant influence over that audit client.
restrictions also apply to other financial interests
Restrictions also apply to other financial interests
  • Loan/debtor or creditor relationship
  • Savings and checking accounts
  • Broker-dealer accounts
  • Specified restrictions also apply to futures commission accounts, credit cards and insurance products
certain exceptions are made for
Certain exceptions are made for:
  • Inheritances and gifts
  • New audit engagements
  • Employee compensation and benefit plans
auditors are also not independent if their audit client
Auditors are also not independent if their audit client
  • Has a financial relationship in the accounting firm
  • Is engaged to act as an underwriter, broker-dealer, market-maker,etc for the firm
employment relationships
Employment Relationships

Restrictions on employment apply to:

  • Current audit firm employees
  • Certain relatives of audit firm employees
  • Former audit firm employees
  • Former audit client employees
the rules narrow the limits on people who leave the firm to go to work for the audit client

The rules narrow the limits on people who leave the firm to go to work for the audit client

designed to ensure that the economic relationships are severed

business relationships
Business Relationships
  • Direct or material indirect relationships with audit clients are prohibited
  • Such as serving in a decision-making capacity as an a officer, director or substantial stockholder
scope of services
Scope of Services

IT

Internal audit

Legal

Human resources

information technology services

Information Technology Services

Financial information systems design and implementation is permissible if the following 5 conditions are met

information technology services15
Information Technology Services

Management must:

  • Acknowledge in writing to the auditor and audit committee, responsibility for internal controls
  • Appoint an employee responsible for design and implementation of system hardware or software
  • Make decisions concerning systems evaluated and selected, controls and procedures implemented, scope, timetable, testing, training and conversion plans
  • Evaluate adequacy and results of the design and implementation of the hardware or software system
  • Not rely on the auditor’s work as the primary basis for determining the adequacy of internal controls and financial reporting systems
internal audit services
Internal Audit Services
  • Limited up to 40% of total hours for internal audit activities during the fiscal year
  • Applies only to companies with $200 million or more in total assets
  • Operational internal audit services that are not related to internal controls, financial systems, or financial statements are not restricted
to avoid internal audit services restrictions

To Avoid Internal Audit Services Restrictions

Management must:

Acknowledge in writing to external auditors and audit committee, responsibility for internal controls

Appoint an employee to be responsible for the internal audit function

Determine the scope, risk and frequency of internal audit activities, including those performed by the auditor

Evaluate findings and results arising from internal audit activities, including those performed by the auditor

Evaluate adequacy of audit procedures and findings

Not rely on the auditor’s work as the primary basis for determining the adequacy of internal controls

an auditor cannot be independent and perform
An auditor cannot be independent and perform
  • Bookkeeping and other services related to audit client accounting records or financial statements
    • Exceptions are made for emergency or other unusual situations
    • Foreign divisions or subsidiaries under certain circumstances
  • Financial information system design and implementation
    • Operation or supervision of the audit client’s LAN
    • Design or implementation work related to the aggregation of data underlying the client’s financial statements
other services restricted by guidelines
Other services restricted by guidelines
  • Appraisal or valuation services
  • Actuarial services
  • Human resources
  • Management functions
  • Broker-dealer services
  • Legal services...
legal services
Legal Services
  • Refers to all types of services that requires a lawyer practicing before U.S. courts
annual proxy statement disclosures
Annual Proxy Statement Disclosures

Must Report Fees Paid to the Principal Independent Accountant Broken Down Into:

  • Type I – Annual Audit Fees
    • Aggregate fees billed for auditing the annual financial statements and Forms 10-Q during the fiscal year
  • Type II - Financial Information Systems Design and Implementation Fees
  • Type III - All Other Fees
    • Can be broken out in greater detail to give better and clearer disclosure

(Note: Year-over-year comparative disclosure is not required)

disclosures cont
Disclosures (cont.)
  • Whether the audit committee considered the provision of non-audit services as compatible with maintaining the auditor’s independence
    • AC only needs to disclose whether the consideration was made, not required to state the conclusion
    • AC may disclose that the consideration was not made
    • AC is not required to pre-approve non-audit services
  • If more than 50%, disclose the percentage of hours on the audit engagement performed by persons other than full-time employees of the firm
the independence rule becomes effective on february 5 2001

The Independence Rule Becomes Effective on February 5, 2001

Applies to proxy and information statements filed by companies with 12/31/00 year ends

transition provisions

Transition Provisions

18 month transition period for non-audit services

3 month transition period for financial and employment relationships that did not impair independence under the pre-existing rules of the SEC, ISB and AICPA

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