The SEC issued a Final Rule
, Auditor Independence With Respect to Certain Loans or Debtor-Creditor Relationships
, which is intended to refocus the analysis an auditor is required to complete related to potential lending relationships with certain shareholders of an audit client at any time during the audit or professional engagement period.
The amendments will allow auditors to more effectively identify debtor-creditor relationships that could impair an auditor’s objectivity and impartiality, and will eliminate the need to evaluate relationships that are unlikely to pose an independence threat.
The adopted amendments are summarized below.
1. Auditor’s analysis to focus on beneficial ownership
In evaluating debtor-creditor relationships, auditors will focus their analysis solely on “beneficial ownership” and not consider those owners who merely hold the audit client’s equity securities as a holder of record on behalf of their beneficial owners.
2. Significant influence test applied in debtor-creditor relationship analysis
The existing 10% bright-line shareholder ownership test will be replaced with a “significant influence” test for identifying debtor-creditor relationships that need to be monitored by the auditor.
- Auditors may apply the principles for assessing significant influence in ASC 323, Investments – Equity Method and Joint Ventures.
- Considerations for significant influence include the following (or other) qualitative factors:
- – Beneficial ownership meets or exceeds 20% ownership of the equity shares of an audit client.
- – Entity or individual has oversight or decision-making over the audit client’s operating and financial policies
The evaluation should be based on the particular facts and circumstances relevant to the audited entity.
The amendments will allow auditors to more effectively identify debtor-creditor relationships that could impair an auditor’s objectivity and impartiality.
3. A reasonable inquiry threshold is applied
Auditors and audit clients will only be expected to conduct a reasonable inquiry analysis to identify beneficial owners of the audit client’s equity securities. This analysis might include
4. Certain affiliates of the audit client are excluded
- Looking into the audit client’s governance structure and governing documents.
- Reviewing commission filings about beneficial owners.
- Considering other information provided by the audit client.
The Final Rule provides guidance on evaluating the audit client’s definition of “fund audits.” In evaluating lending relationships with a fund audit client, any other fund (not audited) that would be considered a brother-sister affiliate of the audit client may be excluded from the debtor-creditor relationship analysis.
The Final Rule is effective 90 days after it is published in the Federal Register
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