Question 1 (issued January 16, 2001, revised 2004)
Q: The rules do not define an affiliate of an accounting firm. What is the staff's approach to this issue?
A: The definition of an "accounting firm" includes the accounting firm's "associated entities." The Commission uses this phrase to reflect the staff's current practice of addressing these questions in light of all relevant facts and circumstances, and by looking to the factors identified in our previous guidance on this subject. Much of this guidance was cited in footnotes 489 and 491 of Release No. 33-7919 (November 21, 2000), Final Rule: Revision of the Commission’s Auditor Independence Requirements.
Question 2 (issued August 06, 2007, revised 2019)
Q: ASC 810 provides guidance for the preparation of consolidated financial statements. Consolidated financial statements present the financial position, results of operations, and cash flows of a parent and all its subsidiaries as a single reporting entity. Must auditors of the consolidated financial statements be independent of the entities that are included within the consolidated group?
A: Yes. The accountant is required to be independent of all entities that are included within the meaning of "audit client" and "affiliate of the audit client," as defined in Rule 2-01(f).
The definition of "affiliate of the audit client" includes an entity that has control over the audit client, or over which the audit client has control, or which is under common control with the audit client, including the audit client's parents and subsidiaries. The term "control" is defined in Rule 1-02(g) and means, "the possession, direct or indirect, of the power to direct or cause the direction of the management of the policies of a person, whether through the ownership of voting shares, by contract, or otherwise."
The condition for consolidation of an entity under ASC 810 is a direct or indirect controlling financial interest in the other entity, which may arise through the ownership of voting shares, by contract, or otherwise. As a result, entities in the consolidated group would be considered within the definition of an “audit client” or an “affiliate of the audit client.”
Question 3 (issued December 13, 2011)
Q: The definition of “audit and professional engagement period” in Rule 2-01(f)(5) provides that the professional engagement period ends when the audit client or the accountant notifies the Commission that the client is no longer that accountant’s audit client. How is the end date affected if the notification of termination of the engagement period is not effective until some future date or event? For example, where the client notifies the accountant that the relationship terminates with the conclusion of the engagement for the current fiscal year, when does the “audit and professional engagement period” end?
A: In this situation (absent any subsequent notice of termination), the professional engagement period ends with the issuance of the accountant’s report for that particular engagement. It is important to note, however, that even where the termination of the professional engagement period is not effective until a future date or event, the obligation to make a filing under Commission regulations (e.g., on Form 8-K, Form ADV-E, or pursuant to Rule 17a-5 of the Exchange Act, as applicable) upon notification is not affected.
Question 4 (issued August 13, 2003)
Q: Generally, a tax or other specialty partner is not included within the definition of "audit partner." Are there circumstances where a tax or other specialty partner would be included within the definition of "audit partner?" If so, what are the consequences?
A: The term "audit partner" is significant in that it establishes the partners who are subject to the partner rotation requirements and the partner compensation requirements. The discussion of "audit partner" in Release No. 33-8183 (January 28, 2003),Strengthening the Commission’s Requirements Regarding Auditor Independence, text states:
"the term audit partner would include the 'lead' and 'concurring' partners, partners such as ”relationship” partners who serve the client at the issuer or parent level."
"Relationship" partners have a high level of contact with management and the audit committee of the issuer. Therefore, a tax or other specialty partner who serves as the "relationship" partner would be included within the scope of the definition of "audit partner."
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