Q: Has there been any change in the Commission's long standing view (Financial Reporting Policies — Section 600 — 602.02.f.i. "Indemnification by Client") that when an accountant ^[1] enters into an indemnity agreement with the issuer, ^[2] the accountant’s independence would come into question?

A: No. When an accountant and the audit client, directly or through an affiliate, enter into an agreement of indemnity which seeks to provide the accountant immunity from liability for their own negligent acts, whether of omission or commission, the accountant is not independent. Further, including in engagement letters a clause that an issuer would release, indemnify or hold harmless from any liability and costs resulting from knowing misrepresentations by management would also impair the firm's independence.

Q: How do unpaid prior professional fees affect auditor independence?

A: Generally, prior year audit and other unpaid professional fees should be paid before a current audit engagement is commenced in order for the accountant to be deemed independent with respect to the current audit. However, normally a question would not be raised in such situations if, at the time the current audit engagement is commenced, a definite commitment is made by the client to pay the prior professional fees before the current year audit report is issued, or an arrangement is agreed upon for periodic payments to settle the delinquent fees and there is reasonable assurance that the current audit fee will be paid before the audit of the ensuing year begins. But, if audit and other professional services fees are owed to an accountant for an extended period of time and become material in relation to the fee expected to be charged for a current audit, there may be a question concerning the accountant’s independence with regard to the current audit because the accountant may appear to have a direct interest in the results of operations of the client.

Q: Is the giving or acceptance of gifts or entertainment to or from an audit client considered an issue in relation to the “general standard” of auditor independence in Rule 2-01(b)?

A: Rule 2-01(b) provides the “general standard” of auditor independence, which all accountants must meet even if their conduct does not fall within one of the specific prohibitions in Rule 2-01(c). Under the general standard:

The staff would consider all relevant facts and circumstances associated with the giving or acceptance of gifts or entertainment from an audit client in assessing whether the accountant will—or will not—be deemed independent under the general standard. The nature and frequency of the activities may reflect a close personal relationship that could be independence impairing. See, e.g., Release No. 34-78872 (Sept. 19, 2016), In the Matter of Ernst & Young LLP and Gregory S. Bednar; and Release No. 78873 (Sept. 19, 2016), In the Matter of Ernst & Young LLP, Robert J. Brehl, CPA, Pamela J. Hartford, CPA, and Michael T. Kamienski, CPA.