On October 16, 2020, the Securities and Exchange Commission (SEC) adopted final amendments to certain of the auditor independence requirements in Rule 2-01 of Regulation S-X (Reg. S-X), referred to as the auditor independence rule. Under the SEC's auditor independence rule, auditors are required to be independent of their audit clients "both in fact and in appearance."1 The rule includes a non-exclusive list of relationships and circumstances, including certain financial, employment, and business relationships, under which an auditor would not be considered independent from its audit client.
The amendments are intended to "reflect updates based on recurring fact patterns that the [SEC] staff has observed over years of consultations in which certain relationships and services triggered technical independence rule violations without necessarily impairing an auditor's objectivity and impartiality." The SEC adopted the final amendments generally as proposed in December 2019 (see our prior alert for a discussion of the proposed amendments), but with some modifications. The following is a high-level summary of the amendments, as adopted:
What to Do Now?
The amendments will be effective 180 days after publication in the Federal Register; provided, however, that voluntary early compliance is permitted after the final amendments are published in the Federal Register so long as the final amendments are applied in their entirety from the date of early compliance. The adopting release also notes that compliance is required on a prospective basis and that "[a]uditors are not permitted to retroactively apply the final amendments to relationships and services in existence prior to the effective date or the early compliance date if selected by an audit firm."
For more information, please contact any member of the public company representation or capital markets practices at Wilson Sonsini Goodrich & Rosati.
[1] Preliminary Note to 17 CFR § 210.2-01 (referred to as Rule 2-01 of Reg. S-X). In pertinent part, Rule 2-01(b) of Reg. S-X provides the general independence standard, stating that the SEC “will not recognize an accountant as independent, with respect to an audit client, if the accountant is not, or a reasonable investor with knowledge of all relevant facts and circumstances would conclude that the accountant is not, capable of exercising objective and impartial judgment on all issues encompassed within the accountant’s engagement.”
[2] See Rule 2-01(f)(5)(iii) of Reg. S-X.
[3] Rule 2-01(c)(3) of Reg. S-X. “Covered person in the firm” is defined as “the following partners, principals, shareholders, and employees of an accounting firm: (i) the ‘audit engagement team’; (ii) the ‘chain of command’; (iii) any other partner, principal, shareholder, or managerial employee of the accounting firm who has provided ten or more hours of non-audit services to the audit client for the period beginning on the date such services are provided and ending on the date the accounting firm signs the report on the financial statements for the fiscal year during which those services are provided, or who expects to provide ten or more hours of non-audit services to the audit client on a recurring basis; and (iv) any other partner, principal, or shareholder from an ‘office’ of the accounting firm in which the lead audit engagement partner primarily practices in connection with the audit.”