[and] to avoid imposing unnecessary independence restrictions on a partner or managerial employee with only nominal involvement with the client and little risk of impacting the audit. But they are not alone in safeguarding the audit process, and the other fiduciaries charged in this case failed to fulfill their roles and preserve investor confidence.. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee ("DTTL"), its network of member firms, and their related entities. See how we connect, collaborate, and drive impact across various locations. C. The Definition Of "Covered Persons In The Firm" Should Include Only Those Who Have The Ability To Influence The Audit. Proposed rule 2-01(c)(1)(ii)(C) provides that an accountant is not independent when the accounting firm, any covered person, or any of his or her immediate family members has: (1) Any such accounts include assets other than cash or securities (within the meaning of "security" provided in the Securities Investor Protection Act); or, (2) The value of the assets in the account exceed the amount that is subject to a Securities Investor Protection Corporation advance, for those accounts, under Section 9 of the Securities Investor Protection Act.58. Topic 5: Smaller Reporting Companies | DART - Deloitte In these circumstances, the accounting firm should be permitted to take title to the software and resell it to the third party client, as an accommodation to the third party, provided the accounting firm purchases the software on substantially the same terms and conditions available to the audit client's other comparable customers and the accounting firm does not profit from the transaction (i.e., the purchase price for the software is effectively passed on to the third party client andthe audit firm is not paid a commission on the transaction). You may be considered a restricted/covered person if you are on an audit engagement team, in the chain of command, or if you provide 10 or more . Meanwhile, Deloitte represented in audit reports that it was independent of the three funds while Boynton simultaneously served on their boards and audit committees. 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 an "affiliate of the accounting firm" because "the actions and investments of the consulting entity are fairly attributed to the accounting firm because the accounting firm's interest in the consulting entity creates a mutuality of interest in the promotion and success of the entity's consulting projects. Association of Info Object in BW4HANA | Deloitte Global appropriate scope of services. Insert Custom HTML fragment. These policies impact not only your own personal financial relationships, but also those of your spouse, spousal equivalent and dependents. A domestic partnership registered with a governmental body. Question: What does 20% controlling influence mean? We respectfully submit that the proposed rule should provide for an exception when: (1) the indirect financial interest in the audit client is immaterial to the covered person; (2) the beneficiary has no direct or indirect control over the investment decisions or assets of the trust; and (3) the trust was not created by the covered person named as a beneficiary. The agreement provides that NEM acts as the agent of the entity with respect to energy sales, capacity sales and environmental attributes. The system then monitors these entities against the restricted entity list and informs you if there is a potential exception or conflict. An entity is a smaller reporting company if it has a public float (the . 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. II. are owned by the firm," is based generally on the provisions in Section 2(a)(3) of the Investment Company Act of 1940 (the "Investment Company Act") and on the definition of affiliate in Regulation S-X. L. No. The ISB's proposed approach states that: Additionally, considering that auditors will have no practical and timely way to determine changes in the amount of a registered investment company's assets that are invested in an audit client, the determination of what percentage of a registered investment company's assets are invested in an audit client should be made at the time of the investment. Following the text of the proposed rule to its logical conclusion, the investments enumerated in (1) and (2) would be material indirect investments. We do not believe an accounting firm's independence is impaired if an audit client acquires a financial institution at which a covered person has a savings account with an immaterial uninsured balance. "12 The proposed definition's use of "any direct business relationship" and "any equity interest" is overbroad and would capture relationships that would not create a mutuality of interest, such as the relationship with the payroll service provider described above. 3. Indeed, a clear rule that can be applied to the myriad of investment products that may encompass indirect interests through other entities (e.g., mutual funds, unit investment trusts, etc.) A Modified "Chain Of Command" Concept Makes The "Office" Concept Unnecessary, The proposed rule defines "chain of command" to include, among others, "all persons having any supervisory, management, quality control, compensation, or other oversight responsibility over either any member of the audit engagement team or over the conduct of the audit. The Definition Of "Covered Persons" The Entity List specifies the license requirements that it imposes on each listed person. A Restricted List is a list of securities that a banks employees are prohibited from buying or selling, either themselves or via any other person or third party. 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. This approach is consistent with the recent proposal by the International Federation of Accountants ("IFAC"). Materiality should be measured by determining whether the entity is material to the parent or "upstream" entity. There is no evidence of any threat to independence presented by ownership of a mutual fund in such cases, particularly when the plan sponsor is not an audit client. Accordingly, the definition of "audit and professional engagement period" found in proposed rule 2-01(f)(6)(A) should be modified to read that the "the professional engagement period begins when the accountant begins review or audit procedures. The proposed definition of "contingent fee" is largely consistent with existing guidance, which has been applied in practice for many years. exceeds 5 percent of the parent's or investor's consolidated total assets. ", 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.". As a result, certain registrants, and investors, would lose the benefit of the expertise of these retired partners. These individuals should be considered to be in the same position as the accounting firm's professionals on the audit engagement team. 9,135 and 9,136 (1998). potential conflicts regarding restricted investments are identified. In May 2020, the SEC issued a final rule2 to improve the information investors receive regarding acquired or disposed businesses, reduce the complexity and costs of preparing the required disclosures, and facilitate timely access to capital. The Release states that the portion of the definition relating to joint ventures and partnerships is based upon the governing principle that such relationships create a "mutuality of interest between the auditor and its partner or shareholder because the revenue or profits accruing to each party depend, to some degree, on the efforts of each. Furthermore, the Release provides no explanation of how such a loan would impair an auditor's objectivity. When The Gift Or Inheritance Is Immaterial And The Rule 2-01(c) provides a nonexclusive list of financial, employment, business and non-audit service relationships that the SEC views to be inconsistent with the independence standard in Rule 2-01(b). IV. However, the inability to participate in the employee benefit plan is a substantial penalty to immediate family members. The services described herein are illustrative in nature and are intended to demonstrate our experience and capabilities in these areas; however, due to independence restrictions that may apply to audit clients (including affiliates) of Deloitte & Touche LLP, we may be unable to provide certain services based on individual facts and circumstances. Independence is unlikely to be impairedby any collateralized loan that was obtained before independence was required, provided the loan remains current as to all of its terms and has not been renegotiated.54. While registrants are also required to disclose the nature and financial impact of a business combination under the FASBs accounting standards, the SECs requirements are significantly more detailed and can result in considerable financial reporting responsibilities regardless of whether a company acquires businesses frequently or only occasionally. These partners appear to be included in the proposed definition of "chain of command. We are gravely concerned about the limited range of options available to accounting firms for obtaining professional liability insurance. All entities and subentities were listed effective November 9, 2017, unless otherwise indicated. Even and entities five percent or more of whose [voting] securities. Entity List - Bureau of Industry and Security We are committed to conducting business with honesty and the utmost professionalism. The SEC Staff has acknowledged that the perception of independence is based on these factors.49 However, it does not appear that the proposed rule on "other financial interests" considers these factors. The Glass-Steagall Act is the name commonly used to refer to 16, 20, 21 and 32 of the Banking Act of 1933, 12 U.S.C. A fresh look at SEC reporting Reporting and disclosure in accordance with SEC requirements can be difficult and demanding for many companies. The SECs investigation was conducted by James J. Bresnicky and Brian M. Privor, and supervised by J. Lee Buck II. List of securities that cannot be bought or sold by employees or other individuals. 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. Furthermore, under the proposed rule, an accounting firm's independence would be deemed impaired if an uninvolved partner's spouse obtains any stock options in an affiliate of an audit client served by the partner's office.