Office of the Chief Accountant:
Application of the January 2003 Rules on Auditor Independence
Frequently Asked Questions
The answers to these frequently asked questions represent the views of
the Office of the Chief Accountant. They are not rules, regulations or
statements of the Securities and Exchange Commission. Further, the
Commission has neither approved nor disapproved them.
Note: Since the adoption of the Commission's Rules on
Strengthening the Commission's Requirements Regarding Auditor Independence
(Release No. 33-8183,
January 28, 2003), the SEC staff has received questions regarding the
implementation and interpretation of the rules. We encourage these questions
and related correspondence regarding auditor independence. Additional
questions on auditor independence issues should be directed to Ed Bailey (baileye@sec.gov),
Dan Dodson (dodsond@sec.gov) or Greg
Faucette (faucetteg@sec.gov) in the
Office of the Chief Accountant, Mail Stop 1103, 450 Fifth Street, NW,
Washington, DC 20549; telephone: (202) 942-4400. Questions regarding
disclosure in proxy statements should be directed to the Office of Chief
Counsel in the Division of Corporation Finance at (202) 942-2900. Questions
related to investment companies should be directed to Adeel Jivraj (jivraja@sec.gov)
in the Division of Investment Management at (202) 942-0590.
Partner Rotation-Transition Questions
Question 1
Q: The 2003 audit of a calendar year client will be the last audit
of that client for the person currently serving as the "lead" partner. The
Commission's rules specify that, as of the beginning of the next year (e.g.,
January 1, 2004), the firm is not independent when the "lead" partner has
served for more than five years. How does the staff believe that the
transition should be applied?
A: The intention of the transition rules is to allow a "lead"
partner to finish the current audit (e.g., the calendar 2003 audit).
The "lead" partner could complete the current audit even though work would
extend beyond January 1, 2004, without impairing the firm's independence.
However, care must be taken to ensure that the partner is not involved in
work that may be performed with respect to the first quarter of the 2004
reporting period. Since some of this work may be performed simultaneously
with the audit, firms will need to carefully monitor the transition to
ensure compliance with the rotation requirements.
Question 2
Q: A "lead" partner served for seven years and was off for two
years prior to the effective date of the new independence rules. For
example, for a calendar-year client, the "lead" partner completed his or her
seventh year of service on the engagement for the 2001 audit. He or she
subsequently did not participate in the audit for either 2002 or 2003 in
accordance with the then-existing "lead" partner rotation rules. Can the
partner return to the engagement in 2004, and, if so, for how long?
A: The partner can serve five years as "lead" partner beginning
with the 2004 audit. Under the previous rotation rules, the partner would
have been able to return to the 2004 engagement with a fresh clock.
Therefore, the staff believes that he or she can begin fresh since he or she
was out for the requisite period under the old rules.
Question 3
Q: Assume that in the previous situation, the "lead" partner had
only been out one year (e.g., the 2003 audit) before the new rules
became effective. Can the partner return to the engagement in 2004, and, if
so, for how long?
A: In Question 2, the partner would have been able to return to
the engagement in 2004 under the old rules. In Question 3, however, the
partner would not have been able to return to the engagement in 2004 under
the old rules. Accordingly, the partner would have to complete the requisite
time out period specified under the new rules since, under the Commission's
transition provisions, prior service as the "lead" partner counts for
purposes of determining the "lead" partner's service on the engagement.
Since the partner has been out for only one year, he or she would have to be
out for an additional four years before returning to the engagement.
Question 4
Q: Assume that a "lead" partner had completed three years in the
role of "lead" partner prior to the effective date of the new rules. For how
many years would he or she be permitted to continue in the role of "lead"
partner after the effective date of the new rules?
A: He or she could serve for two additional years as either
"concurring" or "lead" partner, since prior service counts in determining
the rotation requirements for "lead" partners.
Question 5
Q: Assume that a "lead" partner had completed five or more years
in the role of "lead" partner prior to the effective date of the new rules.
Could he or she be permitted to continue in the role of "lead" partner for
the current year's audit after the effective date of the new rules?
A: The rules relating to partner rotation became effective for
fiscal years beginning on or after May 6, 2003. If the audit engagement of
the first year ending on or after that date is the fifth, sixth, or
seventh year that a partner serves in the capacity of "lead" partner, he or
she could complete such audit before being required to rotate off the
engagement. He or she could not participate as the "lead" partner in
the audit for the first year beginning on or after May 6, 2003.
Question 6
Q: A "concurring" partner served for seven years and was off for
two years prior to the effective date of the adoption. For example, for a
calendar-year client, the "concurring" partner completed his or her seventh
year of service on the engagement for the 2001 audit. He or she subsequently
did not participate in the audit for either 2002 or 2003. Can the partner
return to the engagement in 2004, and, if so, for how long?
A: In this situation, the partner would be allowed to start the
engagement in 2004 as an "audit" partner with a fresh clock. Therefore, he
or she could serve for five years as either the "lead" or "concurring"
partner before rotation or as an "other audit" partner for seven years
before rotation.
Question 7
Q: Assume that in the previous situation, the "concurring" partner
had only been out one year (e.g., the 2003 audit) before the new
rules became effective. Can the partner return to the engagement in 2004,
and, if so, for how long?
A: The partner would be allowed to return to the engagement in
2004 with a fresh clock. It should be noted that this is different for the
"concurring" partner than it is for the "lead" partner (see response to
Question 3). These situations are different because the "concurring" partner
previously did not have a rotation requirement and, therefore, did not have
a stated "time out" period. Therefore, the staff believes that it would be
inappropriate to impose the two-year time out period (which previously
applied only to the "lead" partner) to the "concurring" partner.
Question 8
Q: Assume that a "concurring" partner had completed three years in
the role of "concurring" partner prior to the effective date of the new
rules. For how many years would he or she be permitted to continue in the
role of "concurring" partner after the effective date of the new rules?
A: He or she could serve for two additional years as either
"concurring" or "lead" partner since prior service counts in determining the
rotation requirements for "concurring" partners.
Question 9
Q: Assume that a "concurring" partner had completed five or more
years in the role of "concurring" partner prior to the effective date of the
new rules. Could he or she be permitted to continue in the role of
"concurring" partner after the effective date of the new rules?
A: The transition provisions of the rules relating to rotation of
a "concurring" partner provide for one additional year of transition more
than is provided for the "lead" partner. Thus, if the current year's
engagement was the fifth year (or more) of service as a "concurring"
partner, he or she could continue to serve as the "concurring" partner for
audits of fiscal years ending on or before May 6, 2005 before being required
to rotate off the engagement.
Audit Partner and Partner Rotation-Other Matters
For purposes of the following questions assume that the situations are
for time periods after the transition period established in the release has
elapsed.
Question 10
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 the
release 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."
Question 11
Q: What are the rotation requirements for the "relationship"
partner who is not the "lead" or "concurring" partner?
A: As discussed in question 10, the "relationship" partner meets
the definition of an "audit partner" and, therefore, is subject to the
partner rotation requirements. "Lead" and "concurring" partners are required
to rotate off an engagement after a maximum of five years in either capacity1
and, upon rotation, must be off the engagement for five years. Other "audit
partners" are subject to rotation after seven years on the engagement and
must be off the engagement for two years. A "relationship" partner who is
not the "lead" or "concurring" partner would, therefore, be subject to the
seven years of service, two years time out rotation requirement.
Question 12
Q: An accounting firm has served as the auditor of a non-public
company for more than three years using the same partners. The non-public
client is now going through an IPO. What are the rotation requirements for
the "lead" and "concurring" partners?
A: Since the company has become an issuer2
through the IPO process, the partners are now subject to the rotation
requirements. The question is whether some or all of the service time prior
to the IPO should count towards the rotation requirements. The rotation
requirements would be established by the number of years of audited
financial statements that are included in the filing. Some filings would
include three years of audited financial statements while others (e.g.,
filers that use Small Business forms) would include two years of audited
financial statements. Those prior years now would count as prior service in
determining the rotation requirements. Accordingly, both the "lead" and
"concurring" partners would have either two or three additional years before
having to rotate off the engagement, depending on the number of years of
audited financial statements that are included in the filing. The same
conclusion would apply for determining the service time under the rotation
requirements for partners other than the "lead" and "concurring" partners.
The same analysis also would apply to foreign companies that become
issuers. As above, some foreign registrant filings include three years of
audited financial statements while others may include two years of audited
financial statements. The same conclusions regarding the partner rotation
requirements would apply to these foreign companies at the time they become
foreign private issuers.
Question 13
Q: A CPA firm accepts a new audit client that had previously been
audited by another firm. In the course of auditing the current period's
financial statements, it was determined that the prior two periods should be
re-audited by the newly-engaged firm. For purposes of the partner rotation
provisions of the independence rules, does this engagement constitute one
year or three years of service by the audit partners?
A: This constitutes one year for purposes of determining when the
partners would need to rotate. This is a different situation from the IPO
situation (see Question 12). In the IPO situation, the firm and its partners
had an established relationship with the client for more than three years
before the company became a registrant. In this situation, there is no
previous relationship with the client. As noted in the independence release,
one of the objectives of partner rotation is for the firm to have a "fresh
look" at the company. In this situation, there has not been an ongoing
relationship with management or the company. Therefore, the fact that
multiple periods were audited does not create a need to accelerate the
"fresh look." The same would be true for a company preparing its IPO where
it had never had its previous financial statements audited and the auditor
concurrently audited all three periods included in the IPO.
Question 14
Q: Assume that Partner A is an audit partner with Audit Firm Z.
Partner A has served as the "lead" partner on the audit of Company E for
three years. Partner A leaves Audit Firm Z to join Audit Firm Y. In doing
so, Partner A takes Company E with him or her to Audit Firm Y. After joining
Audit Firm Y, how many additional years may Partner A serve as the "lead" or
"concurring" partner for Company E before he or she must rotate off the
engagement?
A: As discussed earlier, the rotation requirement is, in part,
directed towards the need to have a fresh look with respect to the audit
client. Since Partner A has a continuing relationship with Company E, the
prior service would count in the determination of the partner rotation
requirement. As a consequence, Partner A would be able to serve as the
"lead" or "concurring" partner on Company E's audit for two additional years
(thus, serving the client for five consecutive years) upon joining Audit
Firm Y. At that point, Partner A would be required to rotate off the
engagement for the required five-year time-out period.
Question 15
Q: Assume that a client changes its fiscal year-end. As a
consequence, in the year of the change, its "annual" financial statements
would cover less than 12 months. How would this "short" period be counted in
determining when the "audit partners" should rotate?
A: The rules state that a "lead" or "concurring" partner cannot
serve for more than five consecutive years and that other "audit partners"
cannot serve for more than seven consecutive years. The question relates to
what constitutes a "year" for purposes of the rule. Under the SEC's current
rules, a domestic company is not required to file a separate 10-K for the
"stub" period if that period is less than 6 months. If, however, the "stub"
period is six months or longer, then a separate 10-K is required for that
"stub" period. If the issuer is required to file a separate periodic annual
report for the "stub" period, then that period constitutes a "year" for
purposes of the partner rotation requirements. If, however, the issuer is
not required to file a separate periodic annual report for the "stub"
period, then the "stub" period does not constitute a "year" for purposes of
the partner rotation requirements.
Nonaudit Services
Question 16
Q: A firm was not independent with respect to Company A for Year 1
because the firm performed bookkeeping or other prohibited services for
Company A during the audit and professional engagement period of Year 1. For
Year 2, however, the firm is independent with respect to Company A. The firm
is auditing the Year 2 financial statements. In the course of conducting the
audit for Year 2, the firm becomes aware that there will be restatements of
prior year's financial statements. Can the accounting firm re-audit the
prior period financial statements?
A: Rule 2-01 does contain a specific "cure" if the independence
issue related to the prior period is a financial interest. However, if the
independence problem is caused by something else (e.g., having
provided prohibited non-audit services in that prior period), there is no
cure and the firm's independence would continue to be impaired. Since the
accounting firm would need to be independent with respect to that prior
period in order to issue an opinion on that period, the accounting firm
would be precluded from re-auditing the prior period financial statements.
Question 17
Q: For five of the prohibited services (bookkeeping, internal
audit outsourcing, valuation services, actuarial services, information
system design and implementation), the rules contain the modifier that
allows the audit firm to provide these services to an audit client when "it
is reasonable to conclude that the results of these services will not be
subject to audit procedures during an audit of the audit client's financial
statements." The release text discussion indicates that there is a
presumption that the services will be subject to audit procedures. Is
materiality a basis for determining that it is reasonable to conclude that
the services will not be subject to audit procedures (e.g., could the
audit firm provide bookkeeping services for a subsidiary that is immaterial
to the consolidated financial statements)?
A: No. There is a rebuttable presumption that the prohibited
services will be subject to audit procedures. Determining whether a
subsidiary, division, or other unit of the consolidated entity is material
is a matter of audit judgment. Thus, the determination of whether to apply
detailed audit procedures to a unit of the consolidated entity is, in and of
itself, an audit procedure. Therefore, materiality is not an appropriate
basis upon which to overcome the presumption in making a determination that
it is reasonable to conclude that the results of the services will not be
subject to audit procedures.
Question 18
Q: Some accounting firms have developed their own proprietary
income tax preparation software. The software is used to facilitate the
preparation of company income tax returns for various tax jurisdictions. Can
an accounting firm license or sell its proprietary income tax preparation
software to an audit client?
A: Licensing or selling income tax preparation software to an
audit client would be subject to audit committee pre-approval requirements
for permissible tax services. To the extent that the audit client's audit
committee pre-approves the acquisition of the income tax preparation
software from the accounting firm, it would be permissible for the
accounting firm to license or sell its income tax preparation software to an
audit client, so long as the functionality is, indeed, limited to
preparation of returns for filing of tax returns. If the software performs
additional functions, each function should be evaluated for its potential
effect on the auditor's independence (see Question 19).
Question 19
Q: Some accounting firms have developed software modules which
extend the functionality of the proprietary income tax preparation software.
One of the additional software modules that has been developed by some firms
takes the information used in preparing the tax return and generates some or
all of the information needed to prepare the tax accrual and disclosures
related to income taxes that will appear in the company's financial
statements. Can the accounting firm license or sell this type of module to
an audit client either concurrently with or subsequent to the licensing or
sale of its income tax preparation software?
A: No. Since the purpose of the module is to develop the
information needed to prepare a significant element of the company's
financial statements, licensing or selling the module to an audit client
would constitute the design and implementation of a financial information
system, which is a prohibited non-audit service. It should be noted that the
prohibition exists whether or not the module is integrated with, linked to,
feeds the company's general ledger system, or otherwise prepares entries on
behalf of the audit client (even if those entries are required to be
manually recorded by client personnel). The output of the module aggregates
source data or generates information that can be significant to the
company's financial statements taken as a whole.
Audit Committee Pre-approval
Question 20
Q: An issuer has wholly-owned subsidiaries that also are issuers.
The parent company has an audit committee. The wholly-owned subsidiaries do
not have audit committees. Can the audit committee of the parent company
function as the audit committee of the wholly-owned subsidiaries for
purposes of satisfying the pre-approval requirements?
A: Yes. It is appropriate for the audit committee of the parent
company to, in effect, serve as the audit committee of the parent company
and the wholly-owned subsidiaries. In this situation, the subsidiary's
disclosure should include the pre-approval policies and procedures of the
subsidiary and, also should include the pre-approval policies and procedures
of the parent company. It should be noted that this view does not extend to
the fund industry in a manner that would permit an adviser's audit committee
to pre-approve non-audit work on behalf of the funds. For more information,
see Release No. 33-8220, "Standards Related to Listed Company Audit
Committees."
Question 21
Q: An issuer that is a listed company has foreign subsidiaries
that are consolidated. The issuer's "principal" auditor is a member firm of
a network of international accounting firms. Some of the foreign
subsidiaries have statutory audits performed and, in some cases (depending
upon location, size, etc.) the statutory auditor may be a firm outside the
member firm's network. Any statutory audits performed by member firms are
subject to audit committee pre-approval requirements. Do the issuer's
pre-approval requirements run to the statutory non-network auditors for the
foreign subsidiaries or should the issuer's pre-approval requirements run
just to the "principal" audit firm?
A: The Commission's rules relating to listed company audit
committees (see Release No. 33-8220, "Standards Related to Listed Company
Audit Committees") require audit committees to approve all audit services
provided to the company, whether provided by the principal auditor or other
firms. Therefore, the issuer's pre-approval requirements run to the
statutory auditors for the foreign subsidiaries. However, failure of the
audit committee to pre-approve audit services to be provided by another firm
would not affect the independence of the principal auditor.
Question 22
Q: The Commission's rules require the audit committee to
pre-approve all services provided by the independent auditor. In doing so,
the audit committee can pre-approve services using pre-approval policies and
procedures. Can the audit committee use monetary limits as the basis for
establishing its pre-approval policies and procedures?
A: The Commission's rules include three requirements that must be
followed in the audit committee's use of pre-approval through policies and
procedures. First, the policies and procedures must be detailed as to the
particular services to be provided. Second, the audit committee must be
informed about each service. Third, the policies and procedures
cannot result in the delegation of the audit committee's authority to
management. Pre-approval policies and procedures that do not comply with all
three of these requirements are in contravention of the Commission's rules.
Therefore, monetary limits cannot be the only basis for the pre-approval
policies and procedures. The establishment of monetary limits would not,
alone, constitute policies that are detailed as to the particular services
to be provided and would not, alone, ensure that the audit committee would
be informed about each service.
Question 23
Q: Can the audit committee's pre-approval policies and procedures
provide for broad, categorical approvals (e.g., tax compliance
services)?
A: No. The Commission's rules require that the pre-approval
policies be detailed as to the particular services to be provided. Use of
broad, categorical approvals would not meet the requirement that the
policies must be detailed as to the particular services to be provided.
Question 24
Q: How detailed do the pre-approval policies need to be?
A: The determination of the appropriate level of detail for the
pre-approval policies will differ depending upon the facts and circumstances
of the issuer. However, a key requirement is that the policies cannot result
in a delegation of the audit committee's responsibility to management. As
such, if a member of management is called upon to make a judgment as to
whether a proposed service fits within the pre-approved services, then the
pre-approval policy would not be sufficiently detailed as to the particular
services to be provided. Similarly, pre-approval policies must be designed
to ensure that the audit committee knows precisely what services it is being
asked to pre-approve so that it can make a well-reasoned assessment of the
impact of the service on the auditor's independence. For example, if the
audit committee is presented with a schedule or cover sheet describing
services to be pre-approved, that schedule or cover sheet must be
accompanied by detailed back-up documentation regarding the specific
services to be provided.
Audit Committee Communications
Question 25
Q: The release text and rules text are silent with regard to
effective date and transition requirements for Rule 2-07, "Communications
With Audit Committees." Auditing standards presently require certain
communications with audit committees. What is the effective date for the
required communications with audit committees?
A: Because there are no specific transition provisions in the
final release, the communication requirements under Rule 2-07 are effective
for audit reports filed on or after May 6, 2003, the effective date of the
new rules.
Question 26
Q: Would the requirement to communicate with audit committees
apply to situations where the auditor is providing a consent (e.g.,
related to a 1933 Act filing)? If so, what information should be
communicated to the audit committee?
A: Yes. In that situation, the audit report is deemed to be filed.
As a result, the auditor would be required to communicate the relevant
information to the audit committee. Since the auditor would have
communicated the relevant information when the audit report was originally
filed, this communication at the time of the consent may properly be
restricted to updating the audit committee. However, if in the process of
applying audit procedures required by AU §711, matters come to the auditor's
attention that would or could have affected the financial statements or the
auditor's report that was previously filed, all relevant information should
be communicated to the audit committee.
Question 27
Q: The rules require that auditors communicate to the audit
committee alternative applications of GAAP relating to material items that
have been discussed with management. Does this require that auditors discuss
with audit committees transactions where there are alternative applications
of GAAP that occurred subsequent to the balance sheet date that are not
reflected in the financial statements (including the related notes) subject
to audit?
A: Because the rules require the auditor to communicate
alternative applications of GAAP that are material and that the
communications occur before the audit opinion is filed with the Commission,
the rules relate to items that are material to the financial statements on
which the auditor is expressing an opinion. Therefore, such transactions
that have occurred subsequent to the balance sheet date and which are not
required to be reflected in the financial statements or the related notes
are not required to be communicated to the audit committee until the period
in which the transactions affect the financial statements. It should be
noted, however, that the release text indicates that over time these
communications should occur on a "real time" basis and, thus, the auditor is
strongly advised to consider communicating the matters to the audit
committee at the first opportunity after the matters arise.
Question 28
Q: Assume that the issuer's filing contains the report of a
successor audit firm and a predecessor audit firm. Each of the audit firms
will be required to provide a consent. Must each of the audit firms provide
the communications with the audit committee?
A: No. When there is a predecessor-successor auditor relationship,
only the successor auditor is required to communicate with the audit
committee. Prior to providing its consent, however, the predecessor is
required to perform the audit procedures specified in AU §711.
Question 29
Q: Assume that a portion of the company's consolidated financial
statements were audited by a firm other than the principal accountant. Due
to the significance of the portion audited by the other firm, the principal
accountant decides to make reference to the other accountant. Because
reference will be made to the other firm's report, both the audit opinions
of the principal accountant and the other accountant must be filed. Is the
other accountant required to make the specified communications with the
issuer's audit committee?
A: Yes. The Commission's rules require that the auditor
communicate with the audit committee before the audit report is filed with
the Commission. Because, in this situation, the other auditor's report will
be filed, the other auditor also is required to provide the required
communications with the audit committee.
Fee Disclosures
Question 30
Q: What fee disclosure category is appropriate for professional
fees in connection with an audit of the financial statements of a carve-out
entity in anticipation of a subsequent divestiture?
A: The release establishes a new category, "Audit-Related Fees,"
which enables registrants to present the audit fee relationship with the
principal accountant in a more transparent fashion. In general,
"Audit-Related Fees" are assurance and related services (e.g., due
diligence services) that traditionally are performed by the independent
accountant. More specifically, these services would include, among others:
employee benefit plan audits, due diligence related to mergers and
acquisitions, accounting consultations and audits in connection with
acquisitions, internal control reviews, attest services related to financial
reporting that are not required by statute or regulation and consultation
concerning financial accounting and reporting standards. Fees for the above
services would be disclosed under "Audit-Related Fees."
Question 31
Q: Would fees paid to the audit firm for operational audit
services be included in "Audit-Related Fees"?
A: No. "Audit-Related Fees" are fees for assurance and related
services by the principal accountant that are traditionally performed by the
principal accountant and which are "reasonably related to the performance of
the audit or review of the registrant's financial statements."
Operational audits would not be related to the audit or review of the
financial statements and, therefore, the fees for these services should be
included in "All Other Fees." As required by the rules, the registrant would
need to include a narrative description of the services included in the "All
Other Fees" category.
Question 32
Q: The Commission's new independence rules require companies to
disclose fees paid to the principal auditor in four categories ("audit",
"audit-related", "tax", and "all other") for the two most recent years.
Previously, companies were required to disclose fees paid to the principal
auditor in three categories and only for the most recent year. When are the
new fee disclosure requirements effective?
A: The release text indicates that the new disclosure requirements
are effective for periodic annual filings and proxy or information statement
filings for the first fiscal year ending after December 15, 2003.
Thus, the new disclosure requirements are not mandatory until the
calendar-year 2003 periodic annual filings are made in 2004. However, the
release text also indicates that "we encourage issuers . . . to adopt these
disclosure provisions earlier." Thus, companies may, but are not required,
to provide the new disclosures for proxies and other periodic annual filings
that are made prior to the effective date for the new disclosures.
"Cooling Off" Period
Question 33
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 roles 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, 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 34
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. Included in the IPO filing will be three
years of audited financial statements. Do the "cooling off" rules 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 on auditor independence require that the
auditor is independent in each period for which an audit report will be
issued. Thus, just as is the case for prohibited non-audit services,
accounting firms will need to consider their relationship with the client
both prior to and after the time that the client becomes an issuer. Since
the IPO will contain an audit report for three years, the "cooling off"
rules, likewise, would apply to all years. In applying the cooling off
period rules for time periods prior to the IPO filing, the day after the
audit report is dated (rather than the day after the periodic report is
filed with the Commission) is deemed to constitute the commencement of audit
procedures.
Broker-Dealer and Investment Advisers
Question 35
Q: Do the partner rotation and compensation requirements apply to
auditors of non-issuer brokers and dealers or investment advisers that are
non-issuers?
A: The term "audit partner" is intended to apply to an issuer as
defined by the Sarbanes-Oxley Act of 2002. Therefore, for brokers and
dealers or investment advisers which are not issuers as defined by the Act,
the auditors would not be subject to the rotation requirements or the
compensation requirements of the Commission's independence rules. However,
since the prohibition on nonaudit services applies to audit clients, those
provisions would apply to auditors of non-issuer brokers and dealers or
investment advisers.
Endnotes
1 For example, if a
partner served as the "concurring" partner for two years and then began
serving as the "lead" partner, he or she could serve for three years as the
"lead" partner before reaching the maximum five year period as either the
"lead" or "concurring" partner.
2 An issuer is an
entity whose securities are registered under section 12 of the Exchange Act
or that is required to file reports under section 15(d) or that files or has
filed a registration statement that has not yet become effective under the
Securities Act and that it has not withdrawn. Therefore, these conclusions
would be applicable whether or not the filing has gone effective.
http://www.sec.gov/info/accountants/ocafaqaudind080703.htm
