The SEC proposal, released on 30 December 2019, would increase the auditor’s discretion to manage conflicts of interests with their relationships with their clients. The change suggests an alteration to the definition of affiliates of an audit client, which currently states that the independence rules governing an auditor of a portfolio company also extend to any other portfolio company controlled by the same private fund.
The proposal is a shift away from a more prescriptive regime and comes at a time when Australian auditor rules are under increased scrutiny after an increased push from Australia’s largest accounting firms’ into the consulting arena and amid the tightening of Australian rules regarding conflicts of interest for financial advisers.
The new proposed definition will add a qualifier relating to materiality, allowing the auditor to determine if another portfolio company under the fund is material to the fund. If the auditor determines no materiality, it can provide non-audit services to that company without compromising its independence. The different ways auditors assess materiality could lead to variation in analyses.
The SEC proposal would also shorten the period during which U.S. companies planning to go public ensure their auditor’s independence before an IPO. The proposal would cut the “look-back” period from three years to one year for U.S. companies, in line with the current requirement for non-U.S. companies.
The majority of the auditor independence requirements have not been updated since their initial adoption in 2000, and several amendments in 2003.
These rules, if implemented, would go in the opposite direction of Australian independence rules which have been made more stringent.
For more information about these rules, please contact one of our Financial Services team here - Contact Us.
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