Auditor Independence Standards & Rules | GBQ
In the spirit of Independence Day, it’s a good time to review the rules for auditor independence. If you discover potential issues, there’s still plenty of time to take corrective action before next year’s audit begins.

Definition of independence

Independence is one of the most important requirements for audit firms. It’s why investors and lenders trust CPAs to provide unbiased opinions about the presentation of a company’s financial results. The AICPA and the Securities and Exchange Commission (SEC) have rules regarding auditor independence. Even the U.S. Department of Labor has issued independence guidance for auditors of employee benefit plans. The AICPA specifically goes to great lengths to explain how audit firms can maintain their independence from the companies they audit. In short, auditors can’t provide any services for an audit client that would normally fall to the company’s management to complete. Auditors also can’t engage in any relationships with their clients that would 1) compromise their objectivity, 2) require them to audit their own work, or 3) result in self-dealing, a conflict of interest or advocacy. Independence is a matter of professional judgment, but it’s something that accountants take seriously. A firm that violates the independence rules calls into question the accuracy and integrity of its clients’ financial statements.

Prohibited services

Under Rule 2-01 of Regulation S-X, the SEC specifically prohibits auditors from providing the following non-audit services to a publicly traded audit client or its affiliates:
  • Bookkeeping,
  • Financial information systems design and implementation,
  • Appraisal or valuation services, fairness opinions or contribution-in-kind reports,
  • Actuarial services,
  • Internal audit outsourcing services,
  • Management functions or human resources,
  • Broker-dealer, investment advisor or investment banking services, and
  • Legal services and expert services unrelated to the audit.
This list isn’t exhaustive. Audit committees should consider whether any service provided by the audit firm may impair the firm’s independence in fact or appearance. SEC independence rules also prohibit audit firms and auditors from engaging in financial relationships with their public audit clients, such as contingent fees, banking, insurance, debtor-creditor arrangements, broker-dealer relationships and futures commission merchant accounts.

In the spotlight

In a recent statement, the SEC’s Acting Chief Accountant Paul Munter noted that current market conditions have caused many companies to engage in complex business arrangements, including restructurings and special purpose acquisition companies. “Such arrangements have the potential to undermine auditor independence. The [general standard of independence, Rule 2-01(b)] is the heart of the Commission’s auditor independence rule, it always applies, and the Commission investigates and enforces against violations of the general standard,” said Munter. Independence is a critical issue for public and private companies alike. Contact your auditor to discuss any questions you may have regarding auditor independence.   © 2022