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Implications for Issuers from Recent Auditor Independence Enforcement Cases

The SEC recently found that EY violated the auditor independence rules in two cases based on the audit partners’ close personal relationships with members of the issuer finance teams.  In addition to a specific list of prohibitions, the SEC rules on auditor independence includes a catch-all that an accountant is not independent if a reasonable investor with knowledge of all relevant facts and circumstances would conclude that the accountant is not capable of exercising objective and impartial judgment.  We focus here on the consequences of those cases for issuers, including additional inquiries that audit firms may pose to management regarding their knowledge of any personal relationships between their employees and the engagement team. 
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Audit Committees Continue to Expand Reporting in 2015 Proxy Statements

The SEC’s recent concept release on possible revisions to audit committee disclosure has ignited debate about whether additional information, and the type of information, that would be useful to investors regarding the audit committees’ oversight of external auditors. Our memo on the concept release is here, and our comment letter to the SEC is here.

Regardless of whether the SEC takes formal action, the recent review by EY’s Center for Board Matters shows a continuing increase in audit committee disclosures since EY started analyzing these findings in 2012.  After examining 76 of the Fortune 100 companies that have provided three years of consecutive disclosure, the report found that 71% of companies in 2015 proxy statements specified that the audit committee is responsible for the appointment, compensation and oversight of the auditor, compared to 66% last year and 41% in 2012.  
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SEC Concept Release on Audit Committees Predicted to be Issued in March

It is difficult to make any predictions at this point about when the SEC may take any rulemaking-related actions, but the WSJ reports that the Commission intends to issue a concept release related to audit committees by the end of March. A concept release is not rulemaking, and is instead an effort by the SEC to solicit the public’s views. 

Last October, Chair White stated that the SEC staff is working on a concept release that will address many of the same issues noted by the Investor Advisory Group (IAG) of the Public Company Accounting Oversight Board (PCAOB), with respect to the relationship between the audit committee and independent auditors.
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SEC Fines Accounting Firm for Auditor Independence Violations and an Unrelated Company Pulls Prior Financial Statements Audited by Same Firm Due to Inappropriate Personal Relationship

For actively helping two public company clients lobby congressional staff members about pending legislation, the SEC charged Ernst & Young (EY) with violating the auditor independence rules by unlawfully advocating on behalf of audit clients. Although the clients were involved with EY in the lobbying activities, neither were named in the SEC cease-and-desist proceedings against EY, and there appears to be no impact on the companies’ financial statements.   

Prior to 2009, Washington Council EY (WCEY) helped an audit client communicate with House leadership about a pending bill. WCEY passed along a letter from a top executive at the client addressed to House leadership and supporting passage of the bill to congressional staff.
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