determinations is the average for the preceding three years of income before As a member of the three funds boards and audit committees, Boynton was required to complete annual trustee and officer (T&O) questionnaires designed in part to identify conflicts of interest. The proposed rule should also grandfather all collateralized loans obtained from a financial institution under its normal lending procedures, terms and requirements. While we support efforts to modernize the independence rules governing employment relationships with audit clients, we believe the Commission should follow the ISB to develop standards in this area. 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. Independence and quality are essential to Deloitte's objectivity, integrity, impartiality, responsibility to the investing public, and ability to attract and retain clients. Each Deloitte firm has a director of independence who is responsible for overseeing independence matters, including the design, implementation, operation and monitoring of independence quality controls. Through the proposed definition of a "covered person,"70 the proposed rule would unnecessarily restrict the employment of close family members of uninvolved partners. 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. See Codification 602.02.b. that is needed on this page. Deloitte offers a tailored suite of services geared toward public entities who file with the SEC and private ones considering an initial public offering (IPO) or engaging with public counterparts. Explore Deloitte University like never before through a cinematic movie trailer and films of popular locations throughout Deloitte University. 7507, 63 Fed. The Use Of The "Office" Concept Does Not Provide A Useful Framework For Determining Who ShouldBe A "Covered Person". Consider the following examples applicable to us: In defining the "chain of command," the proposed rule should focus upon who has the ability to influence the conduct of the audit, particularly the audit conclusions to be reached in forming an opinion on the financial statements. The Proposed Five Percent Rule Should Be Modified For Certain Persons To Focus On Significant Influence Or Control, IV. International: +1 503-748-0570 The definition of "covered persons" should include leased accounting personnel, employed full-time or part-time by an accounting firm, on the audit engagement team. 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. In the example above, independence may be impaired if covered persons of the accounting firm conducting the audit of Company A havecertain relationships with Company B including: (1) investments;14 (2) loans; (3) savings or checking accounts; (4) brokerage accounts; (5) credit card balances; (6) individual insurance policies or professional liability policies;15 (7) business relationships;16 and (8) certain employment relationships.17 Yet there is no evidence that these relationships with an "affiliate of the audit client," as defined, impair independence when the affiliate is immaterial to the audit client. To stay logged in, change your functional cookie settings. The Release states that the definition of covered persons includes partners from an "office" that participate in a significant portion of an audit because: We disagree with this reasoning. For example, in many countries, the holding of bank accounts, insurance policies and loans issued by audit clients are not perceived as impairing an auditor'sindependence, provided they are obtained in the ordinary course of business, and under normal terms and conditions.50. Boynton agreed to pay disgorgement of $30,000 plus prejudgment interest of $5,329 and a penalty of $25,000. 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. To stay logged in, change your functional cookie settings. Broker Data Import Program (BDIP)A feature of the Tracking & Trading System that allows the professional to receive automatic downloads of their financial holdings from their authorized brokerage accounts. Private companies planning to go public have reams of regulations to get familiar with and analyses to perform. We also believe that the modificationsdiscussed below would further the Commission's objectives to modernize the independence rules. The proposed rule provides an exception for the following loans obtained from a financial institution under its normal lending procedures, terms and requirements: (1) automobile loans and leases collateralized by the automobile; (2) loans fully collateralized by the cash surrender value of an insurance policy; (3) loans fully collateralized by cash deposits at the same financial institution; and (4) a mortgage loan collateralized by the accountant's primary residence provided the loan was not obtained while the borrower was a covered person in the firm or an immediate family member of a covered person in the firm. In the United Kingdom, for example, only 90% of bank account balancesup to a total balance of 20,000 at any one banking institution are currently insured.55 Although having only 10% of the balance uninsured will not impair independence, the operation of the proposed rule in such circumstances would result in an unnecessary and undue burden in requiring auditors to transfer all of their savings and checking account balances to financial institutions that are not audit clients.56 This proposed rule should be modified to prohibit an accounting firm or a member of the audit engagement team from having a savings or checking account at an audit client or a material affiliate of an audit client only if the uninsured balance is material to the accounting firm or individual. Proposed rule 2-01(c)(1)(ii)(G) would prohibit covered persons and their immediate family members from investing in any entity in an investment company complex if the accounting firm's audit client is also an entity in the same investment company complex. . Reg. Boynton did not identify his business relationship with Deloitte Consulting in response to a question calling for identification of his principal occupation(s) and other positions. Relying on his understanding that Deloitte Consulting was a separate legal entity from Deloitte, Boynton also did not identify the business relationship in his responses to a question added to the questionnaire in 2009 inquiring whether he had any direct or material indirect business relationship with Deloitte. What types of relationships should be captured? carrying amount of investment in and advances to the subsidiary or investee If the credit card was obtained under normal terms and conditions, it is unimportant what the credit card balance is at any one point, so long as it is promptly paid down when due. Fullwidth SCC. rules follow that logic. For information, contact Deloitte Global. Representation on Independence, Ethics and ComplianceA personal declaration or statement regarding the facts and circumstances associated with the various financial or other relationships you, your spouse or spousal equivalent, and certain family members may have that directly impact the ability of the Deloitte US Firms to conduct business. items marked with an asterisk (*) are common in India. 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. Such a standard would provide further protection against unavoidable, inadvertent violations of the independence rules and would simplify the independence rules relating to investments in common investment vehicles such as mutual funds and unit investment trusts. 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. 210.2-01, and in extensive interpretations, guidelines and examples in Section 600 of the Codification of Financial Reporting Policies, Matters Relating to Independent Accountants (the "Codification"). Be A "Covered Person", 3. 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. We believe that any potential benefit of the proposed rule would be outweighed by the unnecessary burden it would create, especially considering the high level of consolidation in the banking industry. The system then monitors these entities against the restricted entity list and informs you if there is a potential exception or conflict. Regarding Financial and Employment Relationships, Securities and Exchange Commission [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. Note that unlike your spouse, spousal equivalent and dependents, when it comes to Close Family Members, if you are not aware of these situations, you are not required to ask. The proposed rule is also both underinclusive and overinclusive because it encompasses financial interests which would not impair independence, while allowing other financial interests that may impair independence. 2023. Certain services may not be available to attest clients under the rules and regulations of public accounting. Once added to the RE List , all Covered Persons (see definition in Appendix A) must be in compliance with the SEC and AICPA independence . The Provision Allowing The Commission To Look To "All Second, the proposed definition uses an overbroad and unworkable definition of the term "office" that would include as covered persons partners who have absolutely no involvement with the audit and therefore no ability to influence the audit; indeed, with a more focused definition of "chain of command," the "office" concept becomes unnecessary. What section of SOX restricts the hiring of affiliated auditors? We also have a relationship with a software company to whom we pay an annual fixed fee for the right to market software programs designed to monitor and help assess internal control systems. Second, the proposed rule omits important portions of AICPA Rule 302 and its related interpretation. Although this proposed rule represents a significant step towards modernizing the independence rules regarding the employment of relatives at audit clients, certain modifications are needed to further the Commission's objective of modernizing the independence rules in light of changes to the traditional family structure. "27 However, the professional personnel in accounting firms who would be responsible for providing consulting and other non-audit services, and who are likely to be consulted by the audit engagement team, would be partners and managerial employees, not all of the professional personnel who provided such services. Cultivating a sustainable and prosperous future, Real-world client stories of purpose and impact, Key opportunities, trends, and challenges, Go straight to smart with daily updates on your mobile device, See what's happening this week and the impact on your business. "21 While we support the use of a "chain of command" model, the proposed definition of "chain of command" is overbroad in its inclusion of all individuals who have any type of responsibility over any member of the audit engagement team, regardless of whether such responsibility has any bearing on the audit. 4 to part 744 of the EAR) identifies entities for which there is reasonable cause to believe, based on specific and articulable facts, that the entities have been involved, are involved, or pose a significant risk of being or becoming involved in activities contrary to the national security or foreign policy . If the entity you were seeking did not appear on the list, you may attempt a different search, or if it does not exist, add it by clicking on "add it here" on the screen. The application of the proposed rule to certain relationships between auditors and affiliates of audit clients should be limited to only those affiliates that are material to the audit client.18 This modification is more likely to identify thoserelationships that may impair an auditor's independence and would avoid undue hardships to registrants and accounting firms in situations where registrants have numerous affiliates that are immaterial to them. Rather, the proposed rule appears to prohibit the covered person from owning more than five percent of any entity in which the audit client has any ownership interest. An SEC restricted entity is an audit client and its related entities, where the audit client is subject to the regulation of the US Securities Exchange Commission (SEC), such as when the audit client files its financial statements with the SEC. For example, there is no evidence that an accounting firm's independence would be impaired if the spouse of an uninvolved partner had a $10,001 balance on a credit card issued by an audit client.46 Given these concerns, we believe the Commission should follow the ISB's proposed approach of applying restrictions on "other financial interests" to the accounting firm and professional employees directly involved in providing audit services to the audit client.47. However, the Release does not explain why a definition found in the Investment Company Act is applicable to auditor independence. Companies selling securities in the US or to US investors are required to either register with the SEC or have an exemption. Attention: Mr. Jonathan G. Katz, Secretary, Re: Revision of the SEC's Auditor IndependenceRequirements, File No. 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.) Deloitte Consulting acquired a proprietary brainstorming business methodology from Boynton in 2006 and collaborated with Boynton to implement it and serve both internal and external firm clients through 2011. Add an Entity . 3. What does 20% controlling influence mean? For existing audit clients, a Deloitte firm must evaluate the independence implications of other Deloitte firms' contemplated relationships with that client, including the provision of non-assurance services. non-client and its carrying amount of investments in and advances to the client no employees, it should be maintained in the family tree, because there is no An exception for insurance offered under employer-sponsored benefit plans for immediate family members of covered persons would appear to be appropriate. This capability would support the concept of continuous auditing and promote the use of more sophisticated auditing techniques on a broader scale and consistent basis. 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. If you clicked a link from a site other than DeloitteNet, please contact the CallCenter at 2222 or +1 800 DELOITTE (1-800-335-6488). To learn more, please read our Integrity Helpline FAQs. The application of this proposed rule to both foreign and domestic audit firms is further complicated by the fact that the insurance risk is spread among a number of insurance companies. 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. DTTL (also referred to as "Deloitte Global") does not provide services to clients. It combines the SEC's guidance on reporting for business acquisitionsincluding acquisitions of real estate operations and pro forma financial informationwith Deloitte's interpretations (Q&As) and examples in a comprehensive, reader-friendly format. Unnecessarily Includes All Professionals Providing We combine our size and scope with our knowledge and experience to help you understand and comply with your reporting and disclosure requirements. 1338 (1999). While we oppose codifying SECPS requirements as SEC rules, we believe a reference to compliance with current SECPS quality controls requirementsas a predicate for the firm being excused from inadvertent violations of the independence rules is a viable and desirable alternative. Although we believe that restrictions on certain direct financial interests in an audit client, such as loans and certain credit card balances, are warranted, many of the "other financial interests" in audit clients identified in proposed rule 2-01(c)(1)(ii) are not the type of financial interests that would impair independence. The ISB was formed in 1997 as a result of a cooperative action between the Commission and the American Institute of Certified Public Accountants ("AICPA"). Firm," "Affiliate Of The Audit Client" And "Covered Persons However, if the proposed rule is to include a prohibition with respect to insurance products, it should be limited to (1) individual life insurance products with material cash surrender values, and (2) life insurance policies or annuities that are invested in an audit client or a material affiliate of an audit client. It does not contain an exception for fees received in tax matters, if determined based on the results of judicial proceedings or the findings of governmental agencies. SEC Identification of U.S. The proposed rule to the extent it, in effect, requires firms to adopt specified quality control procedures raises substantial issues concerning the Commission's authority. Comment Letter of Deloitte & Touche on the Proposed Revision From equities, fixed income to derivatives, the CMSA certification bridges the gap from where you are now to where you want to be a world-class capital markets analyst. Also, due to growth in the accounting profession and technological innovations, the traditional "office" has become an unusable, archaic term. continuing operations before income taxes. Thus, for instance, the audit engagement team should always be prohibited from entering into certain relationships with audit clients. 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. Rather, the purpose of the Investment Company Act is to provide a framework to regulate the investing, reinvesting and trading in securities by investment companies, not the independence of auditors. Independence is not impaired when the total value of the assets in a brokerage account are substantially insured. You should report issues concerning potential violations of the law, regulations, professional standards, policy, or the applicable Code of Ethics and Professional Conduct that you believe are not being handled properly. The ERC decided to remove these four entries based on information BIS received pursuant to 744.16 of the EAR and the review the ERC conducted in . Fourth, the definition should include leased personnel who are on the audit engagement team. Explore Deloitte University like never before through a cinematic movie trailer and films of popular locations throughout Deloitte University. The proposed rule is thus too broad. They also agreed to settle the charges. These software programs also allow registrants to implement comprehensive self-assessment programs to resolve control issues on a proactive basis. See Terms of Use for more information. When a 100% ownership interest in a subsidiary Can I change data for any entity on the FCT? What if, in addition to specific answers to specific SEC reporting questions, your company had a knowledgeable and experienced service provider helping foster understanding and implement new processes? change your targeting/advertising cookie settings. In addition, this concept should be extended to bank overdrafts and other similar consumer finance arrangements. Archives are available on theDeloitte Accounting Research Toolwebsite. Time will be needed for covered persons and their family members to unwind financial interests or employment relationships. Deloitte Global supports Deloitte firms with on-going independence consultation, enabling continuous enhancements to global policies, procedural expectations, tools and practice support activities. While we believe the Commission should defer to the ISB, the proposed rule, if adopted, would lead to unintended consequences, raising a number of concerns, including the following: II. 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 of 1933 (the "Securities Act") and that it has not withdrawn. 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. We believe that if the "chain of command" concept is modified to include all professional personnel who have the ability to influence the conduct of the audit, the "office" concept is unnecessary. 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. taxes exceeds 5 percent of the parent's or investor's consolidated income from Proposed rule 2-01(c)(1)(i)(A) would prohibit any investment in an audit client or an affiliate of the audit client by covered persons and their immediate family members. At Deloitte, our purpose is to make an impact that matters by creating trust and confidence in a more equitable society. If our pension plan were to have an immaterial equity interest in a non-client third party that provides payroll services to our audit clients, the third party may be deemed an "affiliate of the accounting firm," even if the third party does not provide any services to us. Deloitte confirmed that Stephen Peers and the West End and City leasing teams, as well as Tony Guthrie and the Lease Advisory team and Mike McChesney and the Dilapidations team will move to Gerald Eve. This Roadmap is intended to help registrants navigate their SEC reporting requirements related to the acquisition or probable acquisition of a business. This will not be the case in all situations. The proposed rule could result in the loss of these relationships. This information will assist you in determining whether or not acquiring or having certain financial relationships would create a potential independence issue. See how we connect, collaborate, and drive impact across various locations. Should all mutual funds be entered in as entities? Accounting Advisory & Transformation Services, What CFOs should know when using non-GAAP measures, Access to Deloitte national office resources (including former SEC employees), Subject-matter knowledge integrated in project teams (e.g., complex accounting, income taxes, internal controls), Professionals with direct experience who understand your business, Ability to quickly deploy local resources, Experience assisting at all stages of the corporate life cycle. 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. We are pleased to present the 2020 edition of A Roadmap to SEC Reporting Considerations for Business Combinations. Please enable JavaScript to view the site. See Terms of Use for more information. Proposed rule 2-01(c)(1)(ii)(D) provides that an accounting firm is not independent when the firm, any covered person, or any of his or her immediate family members has any "futures, commodity or similar account maintained with a futures commission merchant that is an audit client or an affiliate of an audit client. This minimizes much of the administrative nature of maintaining Tracking & Trading and ensures brokerage account transactions are recorded timely and completely. For example, in some countries, banks and other financial institutions do not fully insure account balances. Again, although we believe that it is unnecessary to include uninvolved partners as covered persons, at a minimum this proposed rule should provide an exemption for investments by immediate family members of uninvolved partners in client funds and non-client sister funds through an employer-sponsored benefit plan. 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. Reporting and disclosure in accordance with SEC requirements can be difficult and demanding for many companies. The Proposed Exceptions Would Provide More 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. These policies and procedures are based primarily on independence standards and regulations of the: When applicable national or regional requirements are more restrictive than the requirements in Deloitte Globals policies, Deloitte firms and their people must meet those jurisdictions requirements as well. Toll free: +1 866-850-1485 Sample 1 Sample 2 Sample 3 Based on 3 documents Save Copy In other words, the proposed rule would require the auditor of Company A to be independent of Company B, a non-client, if Company A has an investment in Company B, which makes Company B an affiliate of Company A, even though the investment is immaterial to Company A. 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. 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. Indeed, the current independence rules appropriately recognize that materiality is relevant in determining whether independence is required. Release, 65 Fed. The Proposed Rule Regarding Investments In Audit Clients, A. Deloitte Global was an early signatory to the United Nations Global Compact (UNGC) and to the World Economic Forums Partnering Against Corruption Initiative (PACI). is not reflected in the text of the proposed rule. We fail to see why independence could be impaired in the former, but not the latter. cc: The Honorable Arthur Levitt, ChairmanThe Honorable Isaac C. Hunt, Jr., CommissionerThe Honorable Paul R. Carey, CommissionerThe Honorable Laura S. Unger, Commissioner. Under the proposed rule, an accounting firm's independence would be impaired if an uninvolved partner's spouse, who works for an audit client in a non-restricted role, receives matching amounts in the client's common stock for his or her contributions to a 401(k) plan. How can I see if work has been done on a particular entity? We agree that an auditor's independence will not be impaired by the possession of a brokerage account with a broker-dealer that is an audit client if the value of the assets in the account is within Securities Investor Protection Corporation ("SIPC") coverage.