Accountants and the companies they hire are after a relaxation of the US Securities and Exchange Commission on Friday.
The new rule means that large accounting firms have more freedom to provide services to multiple firms owned by the same investor or group, under a new “materiality standard” for potential conflicts.
The SEC said the changes affected areas of auditor independence rules that created mostly “technical” violations that were typically “insubstantial” and unnecessarily distracting the time and attention of auditors, executives and their audit committees.
“These modernized auditor independence requirements increase investor protection by focusing audit clients, audit committees and auditors on areas that can compromise the objectivity and impartiality of an auditor,” said Jay Clayton, Donald Trump-appointed SEC chairman in 2017.
“They will also improve competition and audit quality by increasing the number of qualified audit firms an issuer can choose from,” he added.
The Commission’s minority Democrats, Allison Messrs. Lee and Caroline Crenshaw, opposed the changes, saying in a statement that they would introduce “more opportunities for uncertainty and error”.
The new rule, first proposed in December, also reduces the number of years in which companies intending to go public or otherwise register with the SEC will have to demonstrate compliance with the Commission’s independence rules of the auditor have complied.
Before that, issuers had to prove compliance for three years. This “review” requirement is now one year. Mr. Clayton, a former Wall Street attorney, has made it a priority of his tenure on the commission to ease the burden on public companies.
Auditor independence requirements have been a hallmark of US market regulation for two decades. The Enron and WorldCom accounting scandals highlight the dangers of auditors getting too close to the companies they are supposed to audit.
The commission wanted to stress on Friday that most of its rules had remained completely unchanged. “These are very tight, targeted changes,” said an SEC official.
In their comments on the proposed rule last year, the four major accounting firms Deloitte, EY, KPMG and PwC welcomed the SEC’s changes.
However, the Council of Institutional Investors, which represents nearly $ 40 billion in assets, cautioned against giving accountants and corporations more leeway in deciding whether involvement with sister companies compromises independence.
The CII in a March letter noted that “auditors differ widely in assessing materiality for financial reporting purposes” and feared that there would be similar inconsistencies in the independence findings.
“There is a risk that the determination of independence will exclude sister companies from consideration whose relationships with or services of an auditor would compromise the objectivity and impartiality of the auditor to the audit client,” the CII said.