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 Securities Regulation

SEC Amends Auditor Independence Rules

By Thomas White, WilmerHale, Retired Partner

On October 16, the Securities and Exchange Commission adopted amendments to its rules governing independence of accounting firms that audit US publicly-traded companies.  The final amendments largely follow the SEC’s proposed amendments (see January 2020 Month-in-Brief), with modifications in certain areas.  According to SEC Chairman Jay Clayton, “These modernized auditor independence requirements will increase investor protection by focusing audit clients, audit committees, and auditors on areas that may threaten an auditor’s objectivity and impartiality.  They also will improve competition and audit quality by increasing the number of qualified audit firms from which an issuer can choose.”

Most notably, the amendments address situations in which relationships with sister companies “under common control” with the entity under audit, such as portfolio companies controlled by the same private equity firm, or companies affiliated with an investment company, can cause independence violations.  The proposal would narrow the definitions of “affiliate of an audit client” and “investment company complex” to only encompass sister entities that are material to both the entity under audit and the controlling entity.

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