(Article from Registered Funds Regulatory Update, July 2022)
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On June 8, 2022, Paul Munter, Acting Chief Accountant for the SEC’s Office of the Chief Accountant, released a statement emphasizing the SEC’s focus on auditor independence and the critical role auditors play in gatekeeping and protecting investors.
The statement noted that Rule 2-01(b) of Regulation S-X, together with the four guiding principles included in the introductory paragraph of Rule 2-01, provides the framework for establishing the independence of accountants and auditors. In addition, Rule 2-01(c) of Regulation S-X contains a non-exclusive list of circumstances that are plainly inconsistent with the accepted standards of independence. Mr. Munter, however, cautioned that accountants, audit firms, registrants, and audit committees should not assume that a “mere checklist” compliance with Rule 2-01(c) concludes their independence analysis. In other words, compliance with the prohibitions enumerated in Rule 2-01(c) is necessary, but not alone sufficient in an independence analysis. Instead, accountants, audit firms, registrants, and audit committees should continue to assess auditor independence for the purposes of considering, beginning or continuing an audit engagement. Moreover, he reminded firms that the SEC investigates and enforces against violations of the general standard, not Rule 2-01(c) compliance alone. In fact, in the past decade, the SEC staff has brought at least four enforcement actions for “standalone” violations of the general standard of auditor independence.
Mr. Munter then turned to address the OCA’s approach to auditor independence consultations. He emphasized that the effectiveness of the consultation process requires that any party seeking guidance communicate all relevant facts and circumstances surrounding their inquiry. During auditor independence consultations, OCA staff will assess, among other things, (i) any prior consultations; (ii) risks presented to investors; and (iii) the impact of any rulemaking, judicial precedent or legislation subsequent to any prior consultations. However, he strongly cautioned firms against placing undue reliance on any historical OCA staff positions even in similar circumstances.
Mr. Munter further highlighted certain recurring issues in recent OCA staff auditor independence consultations. For instance, he noted that accounting firms should consider the implications for auditor independence when providing non-audit services, especially when the extent and magnitude of the non-audit services and business relationships between the accountant and affiliates and non-affiliates of the company being audited would make it difficult for a reasonable investor to conclude that the accountant could exercise objective and impartial judgment in its audit. Moreover, accounting firms should exercise caution when engaging in complex business arrangements and attempting to facilitate these arrangements through restructurings and the use of alternative practice structures.
In concluding his remarks, Mr. Munter reiterated that accounting firms should foster a culture of ethical behavior with respect to all aspects of their professional responsibilities, including auditor independence. Further, accounting firms should establish and maintain quality controls that adequately address regulatory requirements and monitor any internal efforts to circumvent such requirements.
Paul Munter, Acting Chief Accountant, Office of the Chief Accountant, Statement, The Critical Importance of the General Standard of Auditor Independence and an Ethical Culture for the Accounting Profession (June 8, 2022), available at: https://www.sec.gov/news/statement/munter-20220608.