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C. Employment relationships [2-01(c)(2)]
(updated 27 Jun 2019)
us SEC - Audit Independence FAQs
Question 1 (issued August 13, 2003)
Q: The "cooling off" period states that the accounting firm is no longer independent when a member of the audit engagement team commences employment with the issuer in a financial reporting oversight role within the one-year period preceding the date of the commencement of audit procedures. For purposes of applying this provision, is the term "issuer" restricted to the legal entity (typically the parent company) that issues the securities?
A: No. The rule prohibits a member of the audit engagement team from commencing employment in a "financial reporting oversight role" with the issuer if the auditor is to remain independent. The Commission's rules define a financial reporting oversight role as "a role in which a person is in a position to or does exercise influence over the contents of the financial statements or anyone who prepares them…"
The issuer is required to prepare consolidated financial statements to include in filings with the Commission. Therefore, a financial reporting oversight role can extend to the issuer and its subsidiaries. In determining whether an individual is in a financial reporting oversight role with the issuer, consideration should be given to the role the individual is playing, such as his or her involvement in the financial reporting process of the issuer, and the impact of his or her role on the consolidated financial statements.
Question 2 (issued August 13, 2003, revised 2007)
Q: Assume that an accounting firm has been providing audit services to a non-public client. The company now wishes to file an IPO and, in doing so, will become an issuer. The IPO filing will include three years of audited financial statements. Do the "cooling off" rules at 2-01(c)(2)(iii)(B)(1) apply to all audited periods included in the filing or just to the periods after the company becomes an issuer?
A: The Commission's rules require that the accountant be independent in each period for which an audit report will be issued.
Thus, the accountant will need to consider his or her relationship with the audit client both prior to and after the time that the client becomes an issuer. If the filing for an IPO contains an audit report that covers three years of financial statements, the "cooling off" rules, likewise, would apply to all three years.
In applying the “cooling off” period rules for periods prior to the filing for an IPO, the day after the audit report release date (rather than the day after the periodic report is filed with the Commission) is deemed to constitute the commencement of audit procedures.
[3] Except for foreign private issuers for which Rule 2-01(f)(5)(iii) provides: For audits of the financial statements of foreign private issuers, the “audit and professional engagement period” does not include periods ended prior to the first day of the last fiscal year before the foreign private issuer first filed, or was required to file, a registration statement or report with the Commission, provided there has been full compliance with home country independence standards in all prior periods covered by any registration statement or report filed with the Commission.
This is a work of the U.S. Government
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