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March 17, 2020 TO: ICI MembersInvestment Company Directors
Accounting/Treasurers Committee SUBJECTS: Audit and Attest
Audit Committees RE: ICI/IDC File Comment Letter on SEC Auditor Independence Proposal
In December 2019, the Securities and Exchange Commission proposed amendments to its auditor independence rule intended to update certain elements of the rule so that relationships and services that do not pose threats to the auditor’s objectivity and impartiality do not trigger non-substantive violations or potentially time-consuming audit committee review of immaterial matters.[1] The Institute and the Independent Directors Council have filed a joint comment letter on the proposal. The joint comment letter is attached and summarized below.
The proposed amendments would: i) amend the definitions of “affiliate of the audit client” and “investment company complex” to add a materiality qualifier to the analysis of entities under common control; ii) amend the definition of “audit and professional engagement period” to shorten the look-back period for domestic first time filers; iii) add certain student loans and de minimis consumer loans to the categorical exclusions from independence impairing lending relationships; iv) replace the reference to “substantial stockholders” in the business relationship rule with the concept of beneficial owners with significant influence; and v) replace the transition and grandfathering element of the rule with a framework to address inadvertent independence violations that arise as a result of merger and acquisition transactions.
The comment letter supports the proposed amendments. The letter emphasizes the importance of protecting shareholders and ensuring auditor independence. The letter also indicates that modernizing the auditor independence rule to address non-substantive violations that do not impair the auditor’s objectivity and impartiality will save audit committees, management, auditors and Commission staff time and resources and enable them to more effectively direct their attention toward accounting and auditing matters of importance to the integrity and reliability of a fund’s financial statements.
The specific comments contained in the letter include the following:
- Support for the amendment to the definition of affiliate of the audit client that would add a materiality qualifier to entities under common control with the audit client;
- Support for the amendment to the definition of investment company complex that would add a materiality qualifier to investment advisers under common control with the fund’s investment adviser and the funds managed by the common control adviser;
- A recommendation that the Commission clarify the assessment of materiality in the investment company context;
- Support for the amendment that would add student loans to a covered person to the types of loans excluded from the prohibition on loans from the audit client to the audit firm’s covered persons, and recommends that the Commission also permit student loans to the covered person’s immediate family members;
- Support for the adoption of a “transition framework” enabling auditors to cure independence violations that arise from a merger or acquisition transaction; and
A recommendation that the Commission and its staff continue to consider the effectiveness of its auditor independence rule as market and industry conditions evolve. Specifically, the rule should continue to ensure that auditors are independent and at the same time reduce the likelihood of false positives that divert audit committee and management attention from substantive accounting and auditing matters.
Lisa C. Hamman
Senior Associate Counsel
Independent Directors Council
Gregory M. Smith
Senior Director, Fund Accounting and Compliance
endnotes
[1]See Amendments to Rule 2-01, Qualifications of Accountant, Release No. 33-10738 (December 30, 2019) available at https://www.sec.gov/rules/proposed/2019/33-10738.pdf. For a summary of the proposed amendments see SEC Proposes Amendments to Auditor Independence Rule, ICI Memorandum No. 32137 (January 10, 2020) available at https://www.ici.org/my_ici/memorandum/memo32137.