Audit Conduct

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SEC revises independence rule for lending relationships

On June 18, the Securities and Exchange Commission (SEC) issued a final rule, Auditor Independence With Respect to Certain Loans or Debtor-Creditor Relationships, that amends its independence rules when an auditor has a lending relationship with certain shareholders of an audit client during the audit or professional engagement period. (PDF version appears below.) 

The amendments: 

  • focus the analysis on beneficial ownership rather than on both record and beneficial ownership;
  • replace the existing 10 percent bright-line shareholder ownership test with a “significant influence” test;
  • add a “known through reasonable inquiry” standard with respect to identifying beneficial owners of the audit client’s equity securities; and
  • exclude from the definition of “audit client,” for a fund under audit, any other funds that otherwise would be considered affiliates of the audit client under the rules for certain lending relationships.

Amendments were generally in line with the proposed revisions, except that the SEC clarified the definition of "fund."

The release also indicated that the Chairman has directed the staff to formulate recommendations to the Commission for possible additional changes to the independence rules, comments on which were solicited in the proposed revisions to the loan rule.

The amendments will become effective 90 days after they are published in the Federal Register.

More to come - need a little time to "digest" the release.