Update Part 5 of the Rules of the Board, Ethics and Independence, through targeted amendments to conform with changes by the Commission to Rule 2-01 of the Commission’s Regulation S-X, 17 C.F.R. § 210-2.01.
In June 2019 the Securities and Exchange Commission (“the Commission” or “SEC”) adopted amendments to its auditor independence requirements in Rule 2-01 of Regulation S-X, Qualifications of Accountants, regarding the analysis that must be conducted to determine whether an auditor is independent when the auditor has a lending relationship with certain shareholders of an audit client. In December 2019, the Commission proposed additional amendments to Rule 2-01.
The SEC’s proposed December 2019 amendments, if adopted, would amend Rule 2-01 to add certain student loans and de minimis consumer loans to the categorical exclusions from independence-impairing lending relationships under Rule 2-01. In certain circumstances, such loans are not currently allowed under PCAOB Rule 3500T, Interim Ethics and Independence Standards, which requires registered public accounting firms and their associated persons to comply with the AICPA’s interpretations and rulings under Rule 101 of the AICPA’s Code of Professional Conduct (“AICPA Code”), as in existence on April 16, 2003, to the extent not superseded or amended by the Board.
The amendments proposed by the SEC in December 2019 also include revisions to the definitions of several terms in Rule 2-01 currently defined similarly in PCAOB Rule 3501, Definitions of Terms Employed in Section 3, Part 5 of the Rules, including “affiliate of the audit client,” “audit and professional engagement period,” and “investment company complex.”
Without amendments to conform the definitions in PCAOB Rule 3501 and the Board’s interim independence standards (i.e., interpretations and rulings under Rule 101 of the AICPA Code, as previously adopted by the Board) to the Commission’s recent amendments to Rule 2-01 and the proposed amendments to Rule 2-01, if adopted, the objectives of the SEC’s rulemaking may not be fully achieved. In addition, confusion may arise if certain terms are used in both the PCAOB’s and the SEC’s independence rules, but defined differently. Several commenters on the SEC’s proposed amendments urged the Commission and the PCAOB to work together to keep the Board’s independence requirements aligned with Rule 2-01.