SEC explores possible new rules on auditor independence

After the SEC recently revised its rules around debtor relationships that might affect auditor independence, Chairman Jay Clayton instructed the staff to follow up on some concerns raised in public comments responding to the rule. “The chairman has directed the staff to formulate recommendations to the commission for possible additional changes to the auditor independence rules for potential future rulemaking,” said Sagar Teotia, chief accountant at the SEC, at a recent banking conference. “We are actively working on those recommendations.”

The SEC’s latest rulemaking action related to auditor independence amended existing SEC rules to revise limitations on auditors that made it difficult for large, multinational companies to find auditors who would not be conflicted. Teotia said the amendments were intended to “more effectively identify debtor-creditor relationships that could impair an auditor’s objectivity and impartiality, as opposed to certain more attenuated relationships that are unlikely to pose such threats.”

During that rulemaking the SEC noted other issues raised by commenters that merit further consideration, Teotia said. “I look forward to continued engagement from all stakeholders as we proceed with this important work surrounding auditor independence,” he said.

The SEC has had dust ups with virtually all of the major audit firms in recent years over violations of auditor independence rules. The SEC recently settled a case with RSM over more than 100 separate violations stretched across more than a dozen engagements. RSM connected the issue to the recently revised loan rule.

The Public Company Accounting Oversight Board also has a set of auditor independence requirements, and it has noted difficulties as well, most recently sanctioning Marcum and its former partner in charge of auditor independence over advocating for clients as investment opportunities. The PCAOB also brought charges against PwC’s affiliate in Mexico over auditors having prohibited debtor-creditor relationships with a banking client.

Teotia said investor confidence in financial reporting is “highly dependent” on auditors’ commitment to independence, both in fact and in appearance. “Auditor independence lies at the very foundation of the profession and is necessary to reduce threats to auditors’ objectivity and lend credibility to the fair presentation of the financial statements,” he said.

An investor survey conducted by the Center for Audit Quality would suggest investor confidence so far is not too rattled by violations identified the past few years. The CAQ’s 2019 installment of the survey shows 83 percent of investors view auditors as effective in their role as investor protectors, which inched up from 81 percent in 2018. “A belief that auditors provide honest and independent third-party scrutiny was the top reason cited for the 78 percent confidence level in financial information released by public companies,” the CAQ reported.