When considering whether to accept a new client or a new engagement at an existing client, each Deloitte firm must take into account the independence requirements in all applicable jurisdictions. Divestiture of prior employer benefit plans is required within 60 days of hire. Such a result would undermine any hope that the proposed rule would provide clear guidance that would allow accountants, clients, and other persons affected by the proposed rule, to understand the prohibited interests and relationships with respect to audit clients. Securities and Exchange Commission's (SEC) Independence Rules . Tracking & Trading SystemAn internal tool to help you monitor your compliance with independence requirements related to certain personal investments and financial relationships. More specifically, you might benefit from: Matt is an Audit & Assurancepartner for Deloitte & Touche LLP with vast experience in public accounting. For example, the proposed rule appears to prohibit an accounting firm from owning 5.1% of the shares of a non-client mutual fund that owns only .001% of the outstanding common shares of an audit client. Private companies planning to go public have reams of regulations to get familiar with and analyses to perform. According to the SECs order instituting a settled administrative proceeding, Deloitte violated the rules with respect to the appearance of independence by failing to follow its own policies and conduct an independence consultation prior to entering into a new business relationship with Boynton. Auditor independence rules require outside auditors to remain independent from their clients to ensure there is not even the appearance of a firm compromising its objectivity and impartiality when auditing financial statements. 210.102(b). It also recognizes that certain individuals are in a position to influence the audit because of their positions in the firm and others who are brought in to the chain of command because they are consulted with respect to a specific accounting or auditing matter. For example, in some countries, banks and other financial institutions do not fully insure account balances. Deloitte Global supports Deloitte firms with on-going independence consultation, enabling continuous enhancements to global policies, procedural expectations, tools and practice support activities. In addition, the final rule gives management the option to disclose, in the form of a reconciliation in the notes to the pro forma financial information, synergies and dis-synergies (referred to as managements adjustments) if certain conditions are met. Our shared values are not an abstract ethical philosophy, but a powerful, living compass intended to guide us all toward the right decisions and the correct actions, whatever situations we may encounter, whenever and wherever we are. The SEC has five divisions, including the Division, and various offices, such as the Commission's OCA and the Office of General Counsel. There is no evidence that an auditor's objectivity would be im paired when the financial interest is immaterial to the auditor and the auditor cannot dispose of the financial interest. 5110.1 An entity that is not an investment company, asset-backed issuer or majority-owned subsidiary of a parent that is not a smaller reporting company qualifies as a smaller reporting company based on the following criteria: Public float of less than $250 million. The proposed rule should be modified to provide a more meaningful and workable standard, as follows: Covered persons and their immediate family members. We are gravely concerned about the limited range of options available to accounting firms for obtaining professional liability insurance. In the United States, Deloitte refers to one or more of the US member firms of DTTL, their related entities that operate using the "Deloitte" name in the United States and their respective affiliates. The Definition Of "Covered Persons In The Firm" Additionally, the Release states that entities that provide non-audit services to one or more of the accounting firm's audit clients, and in which the accounting firm has any equity interest, has loaned funds to, shares revenue with, orwith which the accounting firm or any covered persons has any direct business relationship, should be considered In the event that the audit client is a fund entity or the investment advisor of a fund entity, we believe the proposed rule would unnecessarily preclude covered persons who are not on the audit engagement team from investing in non-client sister funds. Social login not available on Microsoft Edge browser at this time. For example, there is no evidence that an auditor's independence would be impaired if a covered person had a checking account containing an immaterial uninsured balance.44. The Proposed Exceptions Would Provide More Meaningful Protection With Certain Modifications, A. C. The Definition Of "Covered Persons In The Firm" Should Include Only Those Who Have The Ability To Influence The Audit. International: +1 503-748-0570 A bright-line threshold of five percent applicable to all firm employees and their family members would create an undue burden . Washington, D.C. 20549 If income from continuing operations at 43,180. The Prohibitions Against Certain Relationships With An "Affiliate Of The Audit Client" Should Be Limited To Those Affiliates That Are Material To The Audit Client, C. The Definition Of "Covered Persons In The Firm" Should Include Only Those Who Have The Ability To Influence The Audit, 1. The entry for Modest Marketing LLC was added to the Entity List on January 26, 2018 . This Roadmap is not a substitute for the exercise of professional judgment, which is often essential to applying the financial reporting guidance for various business acquisitions and pro forma financial information. Note that the final rules amendments are not yet reflected in this Roadmapstay tuned for future updates. ", A manager or senior staff accountant who does not participate in the audit but who may supervise or evaluate an assistant staff accountant who also works on other unrelated audit engagements would appear to be included in the proposed definition of "chain of command.". The SECs investigation was conducted by James J. Bresnicky and Brian M. Privor, and supervised by J. Lee Buck II. We are committed to conducting business with honesty and the utmost professionalism. Under the proposed rule, this software company may be deemed an "affiliate of the accounting firm" subject to all of the independence requirements, including prohibitions on investments in our audit clients and their affiliates. Such a result would suggest that independence would be impaired if an accounting firm invests an immaterial amount to acquire 5.1% of a company of which the audit client owns one share. Deloitte actively supports multiple efforts to eradicate corruption throughout the world. The Release provides no explanation to grandfather only those loans fully collateralized by primary residences. Reg. 106-102, 113 Stat. Deloitte is made up of firms that are members of Deloitte Touche Tohmatsu Limited (also referred to as "Deloitte Global"), a private company limited by guarantee, incorporated in England & Wales. The Proposed Exception Should Be Modified To Cover A Named Beneficiary Of A Trust, C. The Proposed Exception For A New Audit Engagement Should Focus Only On When the Audit Services Are Commenced, VII. Further, the payroll service provider would be subject to all of the independence requirements, including prohibitions on investments in our audit clients and their affiliates. Any direct or material indirect investment in audit client. Be A "Covered Person", 3. Considering the remote likelihood that uninvolved partners will be in a position to influence the audit, this restriction should be deleted from the proposed rule. Deloitte & Touche* submits this letter in response to the Securities and Exchange Commission's request for comments on its proposed rule regarding Revision of the Commission's Auditor Independence Requirements, Securities Act Release No. Permitting these investments does not pose a threat to independence given those individuals would not be investing in an audit client of the accounting firm. Certain Persons To Focus On Significant Influence Or Control. We refer to our audit clients, from whom we must maintain our independence, as restricted entities, because we are "restricted" from engaging in certain activities with those organizations. is not reflected in the text of the proposed rule. Fee arrangements between an accounting firm and its client should not be limited unless they impair independence. The Deloitte Global Board of Directors has adopted robust independence policies and procedures (including around global systems and tools) to help Deloitte and its people safeguard their objectivity. The Proposed Exception Should Cover Situations When The Gift Or Inheritance Is Immaterial And TheCovered Person Cannot Dispose Of The Financial Interest, B. See how we connect, collaborate, and drive impact across various locations. Finally, the proposed rule should make it clear that this approach also includes similar insurance coverage in foreign countries. We have a relationship with an applications service provider for accounting and financial systems to develop a web-based auditing system. Non-Audit Services, 4. Many public companies can put out periodic filings, but find themselves in uncharted waters when mergers, acquisitions, or other developments change their SEC obligations. For example, there could be two partners who are assigned to the same office: Partner A is a mutual fundspecialist and Partner B is a healthcare specialist, and both only participate in, and consult on, audits of clients in their industry; yet under the proposed rule, neither partner could have an investment in any of the other partner's clients because they are assigned to the same office. The Commission has recognized that changes in the existing rules are necessary due to "significant demographic changes, changes in the accounting profession, and changes in the business environment that have affected firms. Proposed rule 2-01(c)(3) provides that an accountant is not independent if: Although we agree with the direction of this proposed rule, it provides no basis for prohibiting business relationships with beneficial owners of more than five percent of the equity securities of the audit client or any of its affiliates. Deloitte Global was an early signatory to the United Nations Global Compact (UNGC) and to the World Economic Forums Partnering Against Corruption Initiative (PACI). In addition, this concept should be extended to bank overdrafts and other similar consumer finance arrangements. Close family members (other than immediate family members) of covered persons (other than the audit engagement team). We combine our size and scope with our knowledge and experience to help you understand and comply with your reporting and disclosure requirements. The proposed definition of the "chain of command" would unnecessarily include many individuals who have no direct or indirect responsibility or influence over the audit and who would not be in a position to influence members of the audit engagement team. We suggest that the definition be limited to the partners and managerial employees responsible for the consulting and other non-audit services provided to the audit client as they may be in a position to influence the audit, whereas staff level employees are not. Each member of Crowe Global is a separate and independent legal entity. expected future amounts of such income, the reference point for materiality We respectfully request that the Commission consider the changes suggested in this letter which would substantially address our concerns with the proposed rule governing financial and employment relationships. However, as discussed in our comment letter on the scope of services provisions of the proposed rule, the appearance of auditor independence varies from country to country.48 What may appear to present an independence issue in one country may be perfectly acceptable, or even required, in another country. GMF ID". We pride ourselves in focusing on doing not only what is good for business, but what is good for our people, and the communities in which we live and work. Requiring an accountant to be independent by the time the firm has accepted the engagement may create an unnecessary burden in some situations. "69, VII. 2023. that is needed on this page. However, each client service team should challenge The Use Of The "Office" Concept Does Not Provide A Useful Framework For Determining Who ShouldBe A "Covered Person". "11 The Release does not explain how such a mutual interest could impair an auditor's independence, particularly if the revenue derived from the relationship is not significant to the firm. Internally, Deloitte Global provides Deloitte professionals worldwide with information and guidance on independence issues, as well as enabling technologies to raise awareness and help them comply with rapidly changing and increasingly complex requirements. Regarding Financial and Employment Relationships, Securities and Exchange Commission In this instance, one should not presume that a public utility partner in Virginia would influence the audit of a California public utility client. some other service that could compromise our independence. At Deloitte, our purpose is to make an impact that matters by creating trust and confidence in a more equitable society. Under the proposed rule, this applications service provider may be deemed an "affiliate of the accounting firm" subject to all of the independence requirements, including prohibitions on investments in our audit clients and their affiliates. Restricted Entities means (i) the Company; (ii) any subsidiary of the Company; and ( iii) the successors and assigns of each of the Persons referred to in clauses " (i)," " (ii)" and " (iii)" of this sentence (and any one of the Restricted Entities being a " Restricted Entity "). The Entity List specifies the license requirements that it imposes on each listed person. Independence and quality are essential to Deloitte's objectivity, integrity, impartiality, responsibility to the investing public, and ability to attract and retain clients. Rather, consistent with our proposeddefinition of "affiliate of the audit client," independence should be required only with respect to those non-client non-fund entities that are material to the audit client.66. As a practical matter, third parties will likely sever or avoid these relationships, rather than comply with the independence rules. The Proposed Rule Regarding Investments In Audit Clients, A. An exception for insurance offered under employer-sponsored benefit plans for immediate family members of covered persons would appear to be appropriate. Independence is integrity, professional skepticism, intellectual honesty, and objectivityfreedom from conflicts of interest. Fourth, the definition should include leased personnel who are on the audit engagement team. "65 This proposed rule is overbroad because the definition of an "investment company complex" would unnecessarily prohibit financial relationships with non-client entities that we believe would not impair independence. Accordingly, this proposed rule should be modified to provide that independence will not be impaired if the uninsured assets in the brokerage account are not material to the accounting firm or member of the audit engagement team. Significant influence or control over an audit client. Considering the large market capitalization of many of today's public companies, a modest investment would often place such a company in a position to exercise significant influence, even though the investment is not material to the investor. A domestic partnership has been declared by the parties for joint coverage under an employer health and welfare benefit plan. Nonetheless, under our proposed modified concept of "chain of command," the Virginia partner would be restricted from investing in the California client if he or she was in fact consulted on the audit of that client. To stay logged in, change your functional cookie settings. We believe such a result would be inequitable because the employee might be restricted from selling the stock for a period of time, or until the stock is vested. Proposed rule 2-01(c)(1)(ii)(G) provides that an accountant is not independent when the accounting firm, any covered person, or any of his or her immediate family members has: An "investment company complex" is defined to include, among other things, "[a]ny entity controlled by, under common control with or controlling the investment advisor or sponsor. Indeed, the provision would appear to allow the Commission to find that an auditor's independence has been impaired by a financial interest or activity that is not specifically set out in, or contemplated by, the proposed rule. Advisory (Mutual Given the way in which business is conducted and people communicate today, the "physical proximity" denoted by the address on one's business card does not necessarily equate to "frequent contact" with others sharing that address. The proposed rule should be modified to provide an exception when the financial interest in the inheritance or gift is immaterial to the covered person and the covered person is restricted from disposing of the financial interest for an extended period. When the parent or investor is a We are pleased to present the 2020 edition of A Roadmap to SEC Reporting Considerations for Business Combinations. 7870 (June 30, 2000) (the "Release"). Active efforts to resell an audit client's products or services could create the appearance that the accounting firm is effectively a distributor of the client's products or services. The ISB's proposed approach provides that independence would be impaired if the accounting firm, or any covered person, has a material indirect interestin the audit client.34 Furthermore, the ISB's proposed approach would clearly distinguish between what would constitute an "indirect investment" and a "direct investment." Even with an exemption, most of the time there will be some form of filing (usually a Form D) filed on the EDGAR system. The Proposed Rule Should Provide Certain ExceptionsFor Employer-Sponsored Benefit Plans, V. The Proposed Rule Regarding "Other Financial Interests" Should Be Modified, VI. Deloitte failed to discover that the required initial independence consultation was not performed until nearly five years after the independence-impairing relationship had been established between Deloitte Consulting LLP and Boynton, who was paid consulting fees for his external client work.