non-client and its carrying amount of investments in and advances to the client We pride ourselves in focusing on doing not only what is good for business, but what is good for our people, and the communities in which we live and work. The Proposed Rule Regarding Investments In Audit Clients, A. DTTL (also referred to as "Deloitte Global") does not provide services to clients. On the other hand, the proposed rule appears to allow an accounting firm to own 4.9% of the shares of a mutual fund having a majority of its assets invested in the equity securities of an audit client. insurance, and asset management services and will be added to the Meridien Restricted Entity List ("RE List") in the next several days. "59 Recognizing that SIPC protection is not available for an account maintained with a futures commission merchant, we agree that such accounts might, in certain circumstances, create a perception that an accounting firm's independence has been impaired. See Terms of Use for more information. 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? Explore the principles and values found in the code, an integral part of the commitment Deloitte makes to our common underlying belief that ethics and integrity are fundamental and non-negotiable. +++ DO NOT USE THIS FRAGMENT WITHOUT EXPLICIT APPROVAL FROM THE CREATIVE STUDIO DEVELOPMENT TEAM +++, Telecommunications, Media & Entertainment. We urge the Commission to simply allow existing AICPA guidance to govern this area and not adopt this proposal. The Sarbanes-Oxley Act of 2002 mandates that audit committees be directly responsible for the oversight of the engagement of the company's independent auditor, and the Securities and Exchange Commission (the Commission) rules are designed to ensure that auditors are independent of their audit clients. change your targeting/advertising cookie settings. XI. The proposed rule on "other financial interests" is premised on the concept that an accounting firm must be independent not only in fact, but also in appearance. We fail to see why independence could be impaired in the former, but not the latter. Through the definition of covered person, the proposed rule would prohibit all such investments by the immediate family members of uninvolved partners. 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. If a 20% . An Article Titled SEC Reporting Services already exists in Saved items. Telecommunications, Media & Entertainment. The Definition Of "Covered Persons" We respectfully submit, however, that this proposed rule would be more practical and meaningful with the changes set forth below. There is no sound basis for a restriction on such investments and it does not further the Commission's goals. The prohibitions in proposed rule 2-01(c)(3) exclude relationships in which the accounting firm or a covered person provides professional services or is a "consumer in the ordinary course of business." The proposed definition of an "investment company complex" also would include non-client sister funds. This Roadmap is intended to help registrants navigate their SEC reporting requirements related to the acquisition or probable acquisition of a business. Unnecessarily Includes All Professionals Providing The Proposed Rule On Employment Of Former Employees May Hinder Retired Partners From Serving On Boards, VIII. For Employer-Sponsored Benefit Plans, The proposed rule should provide exceptions for employer-sponsored benefit plans of the immediate family members of certain covered persons, when those benefit plans involve: (1) insurance products;37 (2) direct investments;38 and (3) investment company complexes.39 Such exceptions would further the Commission's goal of modernizing the independence rules in light of the increase in dual-career families.40. It's administered by a third party to help maintain confidentiality and, when requested, anonymity. See Terms of Use for more information. 2023. The proposed rule defines an "affiliate of the audit client" as an entity that has significant influence over the audit client, or an entity over which the audit client has significant influence.13 This proposed definition of an "affiliate of theaudit client" is overbroad, unnecessary and unworkable in today's global economy in which companies are highly diversified and evolve rapidly. It appears that the proposed rule is based upon the assumption that such beneficial owners can influence the audit client. Exceptional organizations are led by a purpose. An ethical mindset supports values-based decision-making when serving clients and during the course of our daily lives. 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. 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. The Proposed Rule On Indirect Investments In An Audit Client Should Include A Workable Materiality Standard, B. 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. We are committed to conducting business with honesty and the utmost professionalism. List of Excel Shortcuts "61 This modification will provide definitive guidance to members of the audit engagement team on how to handle credit card balances with audit clients. Proposed Rule 2-01(c)(2)(iii) provides that an accountant is not independent when: (A) Does not influence the accounting firm's operations or financial policies; (B) Has no capital balances in the accounting firm; and, (C) Has no financial arrangement with the accounting firm other than providing for regular payment of a fixed dollar amount (which is not dependent on the revenues, profits or earnings of the firm) pursuant to a fully funded retirement plan or rabbi trust.71, While we agree with the direction of this proposed rule, we believe that its requirement that fixed-dollar payments from a retirement plan be fully funded is unnecessary.72 An accounting firm's independence is not impaired by these unfundedpayments if the dollar amount and payment schedule are fixed and immaterial to the firm.73, The proposed rule might result in a retired partner having to choose between accepting a lump sum payment (and the related tax consequences) or not serving on, or stepping down from, the board of directors of an audit client of his or her former accounting firm. 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. 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. Insert Custom HTML fragment. The Release explains that the term "significant influence" should be determined in light of the guidance in Accounting Principles Board ("APB") Opinion No. Accordingly, third parties willing to enter into such a relationship with an accounting firm would incur the costs and burden required to monitor their compliance with the independence requirements of the accounting firm. 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. The Quality Controls Provisions Should Be Modified, XI. Covered Person Cannot Dispose Of The Financial Interest. Professionals who are employed by Deloitte are required to comply with our independence policies. The Proposed Exception Should Be Modified Please enable JavaScript to view the site. 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. Even in cases where an entity may have limited purposes and For information, contact Deloitte Global. 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. taxes exceeds 5 percent of the parent's or investor's consolidated income from 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. Deloitte agreed to pay more than $1 million to settle the charges. However, this is not entirely clear considering the inclusion of the accounting firm as a "covered person" for purposes of the proposed rule. This message will not be visible when page is 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. You report the names of entities with which you, your spouse or spousal equivalent, and dependents have a financial relationship. . STUDIO DEVELOPMENT TEAM +++, Put a wealth of information at your fingertips. The investing public depends on independent auditors like Deloitte to test the reliability of publicly-reported financial statements, and they have front-line responsibility for ensuring their own independence, said Stephen L. Cohen, Associate Director of the SECs Division of Enforcement. Materiality should be measured by determining whether the entity is material to the parent or "upstream" entity. These member firms and each of their related entities (each a "Deloitte firm"), along with Deloitte Global . sell investments in restricted entities that are not permissible. Also, due to growth in the accounting profession and technological innovations, the traditional "office" has become an unusable, archaic term. The proposed rule could result in firms being unable to secure adequate insurance. This box/component contains code needed on this page. Generally accepted auditing standards require the audit engagement team to, The ISB is contemplating the same approach. 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. Insert Custom CSS fragment. Certain Persons To Focus On Significant Influence Or Control. These partners appear to be included in the proposed definition of "chain of command. This approach is consistent with the recent proposal by the International Federation of Accountants ("IFAC"). We refer to our audit clients, from whom we must maintain our independence, as restricted entities, because we are "restricted" from engaging in certain activities with those organizations. * As used in this letter, Deloitte & Touche includes Deloitte & Touche LLP and Deloitte Consulting L.P. ** The Release can be found in the Federal Register at 65 Fed. 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. 17 C.F.R. Rather, consistent with our proposeddefinition of "affiliate of the audit client," independence should be required only with respect to those non-client non-fund entities that are material to the audit client.66. These independence policies and procedures are designed to help Deloitte professionals understand and meet independence standards and regulatory requirements to achieve excellence in service delivery. 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. "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. rules follow that logic. Social login not available on Microsoft Edge browser at this time. A. When a 100% ownership interest in a subsidiary is moved from one branch to another, why should it matter where in the family tree it is located? Do not delete! A bright-line threshold of five percent applicable to all firm employees and their family members would create an undue burden . Social login not available on Microsoft Edge browser at this time. Can I change data for any entity on the FCT? Absent the specific relationships above, a Spousal Equivalent relationship may still exist based on individual facts and circumstances. Proposed rule 2-01(f)(5). entities within a family tree? With info object association this data search would be faster. Focus Only On When the Audit Services Are Commenced. what a client states as being material or significant and validate that 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. The Proposed Rule Should Provide Certain Exceptions 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. DTTL and each of its member firms are legally separate and independent entities. Deloittes extensive experience underpins the valuable perspective we bring to SEC reporting. 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. Proposed rule 2-01(c)(1)(ii)(B) would prohibit "any savings, checking or similar account at a bank, savings and loan or similar institution that is an audit client or an affiliate of an audit client, if the account has a balance that exceeds the amount insured by the Federal Deposit Insurance Corporation or any similar insurer." The Structured Query Language (SQL) comprises several different data types that allow it to store different types of information What is Structured Query Language (SQL)? The Proposed Definitions Of "Affiliate Of The Accounting Firm," "Affiliate Of The Audit Client" And "Covered Persons In The Firm" Are Flawed And Should Be Modified, The proposed definition of "affiliate of the accounting firm" would broadly encompass, among other things, any joint venture or partnership or other undertaking in which the accounting firm participates and in which the parties agree to any form of shared benefits, including any form of shared revenue, income or equity appreciation.6 The consequences of being deemed an "affiliate of the account ing firm" are profound, in that any entity that is deemed an "affiliate of the accounting firm" would be subject to all of the independence requirements to which the accounting firm is subject.7. 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. When The Gift Or Inheritance Is Immaterial And The Also consider certain relationships that you are aware of pertaining to your Close Family Members. 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. 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. Building for the next 175: Deloittes Journey to Iconic, Corporate Responsibility & Sustainability, Infrastructure, Transport & Regional Government, Telecommunications, Media & Entertainment, US Securities and Exchange Commission (SEC), Public Company Accounting Oversight Board (PCAOB). 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. AICPA Interpretation 302-1 [ET section 302.02]. . Please enable JavaScript to view the site. TheRoadmap seriescontains comprehensive, easy-to-understand accounting guides on selected topics of broad interest to the financial reporting community. These relationships are beneficial to investors, audit clients and the public. 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. It was officially authorized in 1998. Please see www.deloitte.com/about to learn more about our global network of member firms. Thats why Deloitte ethics teams continue to proactively strengthen our culture of integrity across the network. In other words, Company A's investment in Company B could be .001% of Company A's total assets, but Company A's auditors would have to be independent of Company B. 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. Reporting and disclosure in accordance with SEC requirements can be difficult and demanding for many companies. Please enable JavaScript to view the site. For example, in some countries, banks and other financial institutions do not fully insure account balances. Meanwhile, Deloitte represented in audit reports that it was independent of the three funds while Boynton simultaneously served on their boards and audit committees. This construction provides a more meaningful framework because it appropriately restricts the investment of individuals based on the particular person's ability to influence the audit, or based on whether a particular investment could create an appearance issue. APB Opinion No. Internally, Deloitte Global provides Deloitte professionals worldwide with information and guidance on independence issues, as well as enabling technologies to raise awareness and help them comply with rapidly changing and increasingly complex requirements. We are pleased to present the 2020 edition of A Roadmap to SEC Reporting Considerations for Business Combinations. 20% is the rule for significant influence and the independence companies created solely for tax purposes could maintain a tax engagement or 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. 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"). 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 determination should be based upon whether such beneficial owners can exercise significant influence or control over the audit client and whether the beneficial owner's investment in the audit client or its affiliate is material to the beneficial owner. "11 The Release does not explain how such a mutual interest could impair an auditor's independence, particularly if the revenue derived from the relationship is not significant to the firm. Even with an exemption, most of the time there will be some form of filing (usually a Form D) filed on the EDGAR system. Ethics & Independence has been removed, An Article Titled Ethics & Independence already exists in Saved items. 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. 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. We agree that the proposed rule should recognize situations in which an accountant might be deemed to lack independence due to events beyond his or her control, such as the receipt of a financial interest through inheritance or gift. Trading securities on a restricted list can result in serious legal and financial repercussions. A Modified "Chain Of Command" Concept The Definition Of "Covered Persons In The Firm" "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.