Auditor Independence with Respect to Certain Loans or Debtor-Creditor Relationships

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The SEC has amended its independence rule in Regulation S-X. The rule requires auditors to be independent of their clients both in fact and in appearance. The amendment focuses on restriction on debtor-creditor relationships (“loaning relationships”). The pre-amendment provisions stated that an accountant is not independent when an accounting firm, any covered person in the firm or any of his or her immediate family has any loan from an audit client or any of the clients’ officers of record or from a beneficial owner of more than 10 percent of the audit client’s equity securities. The amendment focuses on beneficial ownership rather than on both record and beneficial ownership. It replaces the 10 percent ownership test with a significant influence test. The significant influence test concept here hinges on the same concepts as in FASB Accounting Standards Codification Topic 323, Investments – Equity Method and Joint Ventures. It adopts a known-through-reasonable-inquiry standard in identifying beneficial owners of the audit client’s equity ownership. It also excludes any other funds that could be considered affiliates of the client under certain lending relationships from the definition of audit client for a fund under audit.  

The objective of the amendment is to focus on lending relationships that could impair an auditor’s objectivity and impartiality that are important to investors. Read the actual ruling on the SEC website.

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