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. 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. 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. The Proposed Business Relationship Rule, IX. Consider contacting Independence Compliance Onboarding if you are aware of a Close Family Member who has one of the following situations: a financial interest in a company that is material to his/her net worth or employment in an accounting, financial reporting or other significant role at a company. 18, "The Equity Method of Accounting for Investments in Common Stock" (Mar. expected future amounts of such income, the reference point for materiality 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). Section 210.1-02(b) of Regulation S-X defines an "affiliate" as any "person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the person specified." Structured Query Language (known as SQL) is a programming language used to interact with a database. Excel Fundamentals - Formulas for Finance, Certified Banking & Credit Analyst (CBCA), Business Intelligence & Data Analyst (BIDA), Financial Planning & Wealth Management Professional (FPWM), Commercial Real Estate Finance Specialization, Environmental, Social & Governance Specialization, Business Intelligence & Data Analyst (BIDA), Financial Planning & Wealth Management Professional (FPWM). No, all costs incurred as part of this effort are expected to be Beneficial ownership (as evidenced by the filing of a Schedule 13D or 13G) of more than five percent of a class of an audit client's equity securities, or significant influence or control over an audit client. Deloitte's independence requirements are defined by specific sets of policies and external rules and regulations to help both you and the organization remain independent when providing services to attest (audit) clients. From determining the financial statements required for an acquisition to the creation of pro forma financial information, complying with Securities and Exchange Commission (SEC) rules and regulations can be difficult. Proscribed/restricted category 1 & 2 - All ranks who are part of the audit engagement team, providing any amount of time or Partners /principals, associate partners, partner equivalents who are always covered person, chain of command should verify that they are not a covered person related to the entity or its affiliates before investing in . Deloitte actively supports multiple efforts to eradicate corruption throughout the world. "62 This proposed rule is unnecessary because there is no nexus between insurance coverage and threats to independence. non-client and its carrying amount of investments in and advances to the client 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 . "30 Footnote 131 cites to section 602.02.b.iii. The final rule must be adopted for fiscal years beginning after December 31, 2020; however, early application is permitted. subsidiary or investee is not readily available, the parent's or investor's It combines the SECs guidance on reporting for business acquisitionsincluding acquisitions of real estate operations and pro forma financial informationwith Deloittes interpretations (Q&As) and examples in a comprehensive, reader-friendly format. The parties hold themselves out as married. 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. The Proposed Five Percent Rule Should Be Modified For Certain Persons To Focus On Significant Influence Or Control, IV. Independence is integrity, professional skepticism, intellectual honesty, and objectivityfreedom from conflicts of interest. See Terms of Use for more information. is sorely needed. Independence is not impaired when the total value of the assets in a brokerage account are substantially insured. DTTL and each of its member firms are legally separate and independent entities. 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 proposed rule does not provide an exception for investments, in the form of stock compensation, by the immediate family members of such persons obtained through employer-sponsored benefit plans. Instead, the proposed rule seems to be premised on the notion that the "appearance of independence" is a universal truth that the Commission can impose on the rest of the world. Broker-dealer/securities accounts (including Demat accounts*, retirement (IRA), health savings accounts, and trust accounts). 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. Those license requirements are independent of, and in addition to, license requirements imposed elsewhere in the EAR. Will the Firm Contribution Tool run in parallel with the Restricted Entity List? Explore Deloitte University like never before through a cinematic movie trailer and films of popular locations throughout Deloitte University. 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. If this were the case, the accounting firm may appear to have a mutuality of interest in the success of such products and services, and directly benefit through profit margins or commissions on each sale. Title: Investment policy for partners of KPMG (the . 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. Thank you for reading CFIs guide on Restricted Trading List. Among other things, this business relationshipwill allow us to achieve a better understanding of web-based auditing systems and could result in the development of a sophisticated web-based auditing system that would allow for more use of advanced auditing techniques. The SECs order censures Deloitte for violating the auditor independence standards of Rule 2-02(b) of Regulation S-X, and sanctioned Deloitte for causing the funds to violate Sections 20(a) and 30(a) of the Investment Company Act and Rule 20a-1 thereunder. It was officially authorized in 1998. 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 Securities and Exchange Commission today charged Deloitte & Touche LLP with violating auditor independence rules when its consulting affiliate maintained a business relationship with a trustee serving on the boards and audit committees of three funds it audited. DTTL and each of its member firms are legally separate and independent entities. 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). However, the Release does not explain why a definition found in the Investment Company Act is applicable to auditor independence. 2. For example, the final rule modifies certain significance tests to reduce the potential for anomalous results that may have required a registrant to provide acquiree financial statements that may not be material to investors. The proposed rule should be modified to provide a more meaningful and workable standard, as follows: Covered persons and their immediate family members. You report the names of entities with which you, your spouse or spousal equivalent, and dependents have a financial relationship. On March 30, 2022, the SEC issued a proposed rule 2 that would "enhance investor protections in [IPOs] by [SPACs] and in subsequent business combination transactions between SPACs and private operating companies [also known as de-SPAC transactions]." 1338 (1999). How does the FCT relate to Global Independence systems such as DESC? 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. Audit committee guide: Evolving from good to great Event summary. Ethics & Independence has been removed, An Article Titled Ethics & Independence already exists in Saved items. Deloitte Global CEO Punit Renjen challenges Deloitte professionals to break down barriers and work together to transform the organization from the largest professional services provider in the world into an iconic one. The people of Deloitte must remain unbiased and free from conflicts of interest with our clients, in fact and appearance. We suggest that this proposed rule be expanded given that an accounting firm's independence will not be impaired if a member of the audit engagement team has a brokerage account with immaterial assets in excess of SIPC coverage. Do not delete! This box/component contains code needed on this page. 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. Proposed rule 2-01(c)(5) provides that an accountant is not independent if the accountant provides any services to the audit client or an affiliate of an audit client for a contingent fee. We also recommend that the 30-day divestment period should commence when the auditor has: (1) actual knowledge of the gift or inheritance; and (2) the right to dispose of it. This box/component contains code Fund Complexes) ( A ). 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. The parent's or investor's aggregate As noted in the Release, the "materiality" concept for purposes of auditor independence should not be confused with the meaning of "materiality" pursuant to Staff Accounting Bulletin ("SAB") No. "79 This is an important concept because when there is reasonable expectation that a court or governmental agency will be involved in determining a tax matter, the results are not determined by the auditor, and accordingly could not impair independence. 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. Each member of Crowe Global is a separate and independent legal entity. Exceptional organizations are led by a purpose. ALPS agreed to pay a $45,000 penalty. 3, "Employment with Audit Clients," directly addresses the provisions of the proposed rule relating to an auditor's employment with audit clients. Designated Officers are individuals who are charged with risk management or general oversight responsibilities and who do not direct, effect, or recommend securities and/or securities-based swap transactions or loan trades for any account. 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. decision. We do not believe that insurance coverage impacts auditor independence. A domestic partnership registered with a governmental body. 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. Registrants may be required under SEC rules to file the acquirees separate annual and interim preacquisition financial statements along with the related pro forma financial information. "69, VII. 1 For a list of abbreviations used in this publication, see Appendix E. 2 SEC Final Rule Release No. Will client access be allowed to the system for them to fill in this information? +++ DO NOT USE THIS FRAGMENT WITHOUT EXPLICIT APPROVAL FROM THE CREATIVE STUDIO DEVELOPMENT TEAM +++, Telecommunications, Media & Entertainment. Certain services may not be available to attest clients under the rules and regulations of public accounting. ), Leasing space to/from a restricted entity (i.e., rent), Ownership of a franchise or a personal business, Severance or any other payments (bonus, 401(k) contribution, etc.) The proposed rule states that an accounting firm will not be independent of an audit client if: Although the beneficial ownership of a considerable percentage of an audit client's equity securities might create the perception that an accountant's independence is impaired, the Release provides no explanation for why the ownership of more than five percent of a registrant's equity securities by a professional employee of an accounting firm who is not on the audit engagement team or in the chain of command would impair an accounting firm's independence. Reg. The expertise and subject matter knowledge we have developed through our audit services is valuable to the success of such an initiative in the new economy. We note that the ISB's and IFAC's proposed approach would not restrict the ability of accounting firms to obtain any type of insurance coverage from audit clients.63. 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. 1 Twitter 2 Facebook 3RSS 4YouTube Certain services may not be available to attest clients under the rules and regulations of public accounting. L. No. Many public companies can put out periodic filings, but find themselves in uncharted waters when mergers, acquisitions, or other developments change their SEC obligations. To stay logged in, change your functional cookie settings. The Proposed Rule Should Not Restrict The Employment Relationships Of The Close Family Members Of Uninvolved Partners, B. 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. 99 used in other contexts of the federal securities laws. For example: The proposed definition of an "affiliate of the accounting firm" would stymie these relationships by broadly including in its definition relationships that are neither found in, nor contemplated by, the current definition of an "affiliate" in Regulation S-X.8 The Release provides no adequate basis or explanation for extending the definition of "affiliate" beyond that found in Regulation S-X, much less creating multiple definitions of the same term.9 In short, the proposed definition would make it virtually impossible for accounting firms to maintain relationships with third parties, including relationships with non-audit clients that have helped to enhance audit quality. Indeed, the current independence rules appropriately recognize that materiality is relevant in determining whether independence is required. Our Code of Ethics and Professional Conduct is inspired by the Global Principles of Business Conduct that articulate the standards to which we as Deloitte professionals, must hold ourselves, wherever in the world we live and work. 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. 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. Matt specializes in serving clients in the energy and resources industry, including exploratio More. This message will not be visible when page is 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. List of Excel Shortcuts Although we believe that it is unnecessary to include uninvolved partners as covered persons, at a minimum the proposed rule should provide an exception for stock compensation offered under employer-sponsored benefit plans for immediate family members of uninvolved partners. Visit www.integrityhelp.com. The parent's or investor's equity in 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. STUDIO DEVELOPMENT TEAM +++, Telecommunications, Media & Entertainment, Stay current: Audit & Assurance subscriptions. 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. 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. Private companies planning to go public have reams of regulations to get familiar with and analyses to perform. 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. To the Securities and Exchange Commission, Mr. Donald J. Kirk (the Independent Reporter), Deloitte & Touche LLP, Ernst & Young LLP, KPMG LLP, and PricewaterhouseCoopers LLP: We have reviewed the design, implementation, and operating effectiveness of the systems, procedures, and Answer: Risk Management has deemed that accounting U.S. sanctions regulations restrict who U.S. persons (i.e., persons located in the U.S., U.S. citizens, and U.S. entities such as Rice University) may do business with, such as conducting financial transactions and shipping ANYTHING (whether or not the equipment, material or item is export controlled) to these individuals and entities. 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. Meanwhile, Deloitte represented in audit reports that it was independent of the three funds while Boynton simultaneously served on their boards and audit committees. Unlike a material investment in a corporation, the success of which could arguably be relevant to an auditor's decision-making process, one's insurance coverage simply does not create an interest in the actual or perceived success of the insurer sufficient to influence a policyholder's judgment. The SEC definition of a promoter includes a founder of the company who is still with the company, or holds at least 10% of any class of its securities. An Article Titled SEC Reporting Services already exists in Saved items. 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. Listed Companies audited by Uninspected Audit Firms Using the determinations provided in the PCAOB's report, the SEC has begun to identify U.S.-listed companies have used an Uninspected Audit Firm to audit their financial statements. . 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. 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. The Release explains that the term "significant influence" should be determined in light of the guidance in Accounting Principles Board ("APB") Opinion No. Disclosure of this information can be important to investors because an acquisition will generally affect a registrants financial condition, results of operations, liquidity, and future prospects. Unnecessarily Includes All Professionals Providing Fullwidth SCC. 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 . XI. What does 20% controlling influence mean? For example, under the proposed rule an accounting firm's independence would be impaired if a first year New York office staff accountant with no involvement in the audit has a spouse who beneficially owns 5.1% of theequity securities of a public audit client that is controlled by unrelated third parties and is audited by personnel in the firm's Los Angeles office. If a 20% . Deloitte Global was an early signatory to the United Nations Global Compact (UNGC) and to the World Economic Forums Partnering Against Corruption Initiative (PACI). A significant number of partners at the local, regional and national levels have input in deciding a particular partner's compensation, even though many of these partners have no other relationship with the partner under consideration or with the partner's audit clients. The entries for "Dow Technology" and "Hassan Dow" were added to the Entity List on February 23, 2016 . sell investments in restricted entities that are not permissible. Securities and Exchange Commission's (SEC) Independence Rules . The accounting firm's independence (or lack thereof) before the commencement of audit, review or attest procedures is irrelevant because, before that period, the covered person was not in a position to influence the audit. 17 C.F.R. the subsidiary's or investee's income from continuing operations before income The Release states that the "chain of command" is "defined broadly to refer to the group of people in the accounting firm who, while not directly on the audit engagement team, are capable of influencing the audit process either through their oversight of the audit itself or through their influence over any member of the audit engagement team."22.