Firms Push SEC to Ease Auditor Independence Rules

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By Amanda Iacone

Large accounting firms want the Securities and Exchange Commission to relax auditor independence rules that bar them from auditing their consulting clients and affiliates, among other changes.

The requests are detailed in public comment letters submitted to the SEC regarding a change to independence rules narrowly focused on loosening lending prohibitions between auditors and their clients.

Some investors pushed back against the changes, asking the SEC instead to reinforce the rules to better promote firm governance and transparency.

The SEC proposal would roll back the scope of what is known as the loan provision—auditors can’t borrow money from their clients—and ease the restrictions for auditing certain debt products, like mutual funds.

The rule has inundated audit committees with potential independence violations that firms and boards alike say don’t represent true threats to audit judgment. It imposes needless tracking of nameless shareholders and investors who can’t exert any influence over the fund, audit firm, or its client.

Investors Seek Transparency

The current rule’s broad definition of audit client extends the auditor independence rules to any investment products that happen to include loans taken out by audit firms. If the firm’s debt is held by an entity with a more than 10 percent stake in a fund’s value, the firm couldn’t audit the fund, nor any sister funds.

The proposal would replace the 10-percent threshold with a “significant influence” test and would also revise the definition of “audit client” to exclude other investment funds that the audit client takes part in.

The Council of Institutional Investors asked that the SEC keep the bright line test, but narrow its application to shareholders who would benefit economically instead of focusing on the investment institution that manages the fund.

The council would also tighten governance rules on accounting firms, requiring them to include independent members on their boards, publish audited financial statements and report key audit quality indicators.

“We believe that improving audit firm governance could potentially enhance the effectiveness of the existing auditor independence rules and auditor independence generally,” the council’s letter states.

The New York State Society of CPAs generally supports the proposed rule changes and said it would make it easier to comply with the rule. But the changes are unlikely to spur competition among the firms.

“We believe that by loosening the extant rule, investment company complexes will be less inclined to diversify the cadre of auditors that they currently use,” the society said in a letter to the SEC.

Firms Want Flexibility

Accounting firms Deloitte LLP, PricewaterhouseCoopers LLP and KPMG LLP asked the SEC to further limit the size and scope of the client’s network and affiliates that would trigger the auditor independence rule. They also asked for a transition period to address potential independence violations stemming from mergers or acquisitions that might change the lender-debtor relationship.

The three firms would further limit the independence rules to just partners on the audit engagement team, not partners working on other audits or non-audit services. However in its letter to the SEC, Crowe LLP said it would support maintaining the current definition of who is covered by the rule so that it was consistent with other SEC rules.

But the firms differed over the significant-influence test. Deloitte supported the change, but KMPG asked for a framework that would apply to any entity regardless of its structure and that would consider all relevant factors, not a bright line test.

Additional Relief Suggested

Firms also asked for the SEC to review its rule that bars a firm from having a business relationship with an audit client, or client decision-makers such as officers, directors, or substantial stockholders.

Crowe and Grant Thornton LLP said that the current “substantial” decision-maker trigger could be replaced with the same significant influence test proposed for the loan provisions.

KPMG also asked for more flexibility providing consulting services to an affiliate of an audit client. KMPG said that providing such services was unlikely to threaten an auditor’s objective judgment.

To contact the reporter on this story: Amanda Iacone in Washington at

To contact the editor responsible for this story: S. Ali Sartipzadeh at

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