SEC Amends "Auditor Independence" Rules Clarifying Debtor-Creditor Relationships

The SEC adopted Rule 2-01(c)(1)(ii)(A) of Regulation S-X (the "Loan Provision") to change the interpretation of "auditor independence" when the auditor has a lending relationship with the shareholders of an audit client.

The Loan Provision amendments are intended to better identify debtor-creditor relationships that could impair an auditor's ability to be objective. The amendments include:

1. refocusing analysis on beneficial ownership rather than record ownership;

2. replacing the 10-percent bright-line shareholder ownership test with a "significant influence" test;

3. adding a "known through reasonable inquiry" standard when identifying beneficial owners of the audit client's equity securities; and

4. excluding investment funds from the definition of "affiliates of the audit client."

The amendments will become effective 90 days after publication in the Federal Register.