SEC Reminds on Auditor Independence

The top accountant at the Securities and Exchange Commission has fired off a statement this week about the importance of audit firm independence and corporate audit committees overseeing that relationship with the external auditor — almost one year to the day after the Trump Administration’s SEC relaxed auditor independence rules. 

The statement came from Paul Munter, the SEC’s acting chief accountant since the Biden Administration arrived. Munter’s statement was a 1,600-word refresher course on audit firm independence and audit committee oversight, and he supposedly issued the statement “as we mark the upcoming 20th anniversary of the enactment of the Sarbanes-Oxley Act.” 

Umm, the 20th anniversary of SOX isn’t for another 10 months. The one-year anniversary of previous SEC leadership relaxing auditor independence rules, however, just happened the other week. And since everything is political these days, of course one wonders whether Munter is sending a message to audit firms and audit committees that they shouldn’t relax too much about this stuff. 

Anyway, back to what Munter actually said.


“The independence of the auditor, in both fact and appearance, is foundational to the credibility of the financial statements,” Munter said. “While sourcing a high quality independent auditor is a key responsibility of the audit committee, compliance with auditor independence rules is a shared responsibility of the issuer, its audit committee, and the auditor.”

OK, nice bit of theory to start the statement. Munter then proceeded to talk about the affirmative duty that all sides have to identify potential threats to auditor independence — including the auditor’s relationships with third parties doing business with the auditor’s client company.

“This proactive monitoring requires management, the audit committee, and the independent auditor to each consider the potential effects of the auditor’s existing business and service relationships with other companies on the auditor’s ability to remain independent of the issuer if a contemplated transaction is consummated,” he said. 

The Standard for Independence

Formally, the standard for auditor independence is stated in Rule 2-01(b) of Regulation S-X. For we non-specialists who haven’t memorized the entire canon of federal securities law, Munter pointed to four principles within the rule that are worth knowing. 

Does the auditor’s relationship with the client or provision of a service… 

  • Create a mutual or conflicting interest between the accountant and the audit client?
  • Place the accountant in the position of auditing his or her own work?
  • Result in the accountant acting as management or an employee of the audit client? or
  • Place the accountant in a position of being an advocate for the audit client?

If the answer is yes to any of the above questions, you have a problem. Or, as Munter said: “We believe it would be a high hurdle to reach a conclusion that the accountant could remain objective and impartial when an auditor has provided services in any of the periods included in the filing that is contrary to any one of these guiding principles.”

Why This, Why Now?

I still can’t help but wonder why Munter released this statement about auditor independence now. Of course the simplest answer is probably the correct one: he just wanted to remind audit committees and audit firms about their independence obligations ahead of year-end audit season, which will begin within a few weeks and go full throttle by early next year. It’s good for regulators to re-emphasize the rules from time to time.

My other thought was whether sometime soon the SEC might revisit the rules it adopted last year to relax auditor independence standards. That doesn’t seem to be on the SEC’s rulemaking agenda right now — and let’s remember, the current SEC leadership has already signaled its plans to revisit plenty of other Trump-era rules. If chairman Gary Gensler wanted to revisit auditor independence too, I think he’d have no trouble saying that, and so far he hasn’t.

For the record, however, the Democratic SEC commissioners who were on the commission last year were not fans of the relaxed independence standards then-chairman Jay Clayton pushed through. Commissioners Caroline Crenshaw and Allison Herren Lee released a joint statement opposing the idea. Their beef was that the relaxed rules give too much discretion to audit firms themselves to decide whether an independence violation is material, or just a technical violation that won’t actually affect the quality of an audit:

By writing this broad standard into the rule, however, we place greater reliance on auditors to decide what is or is not “material.” Thus, we rely on auditors to subjectively determine when their own independence is impaired, and we do so without providing specific guidance on materiality.

That was their complaint one year ago. I suspect Munter is sublty warning audit firms and audit committees to keep that point in mind as we prepare for a new audit season now.

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