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Proposed Changes to Auditor Independence Rules Essay
The article accompanying this page appeared recently in the business press and has been selected by Professor Hong for this assessment. Briefly summarize the article and then analyze it by identifying a particular issue raised in the article and examining its implications.
Do not use the exact language of the article in your own writing and be sure attribute any direct quotations correctly. Your response should have a clearly identifiable thesis position and feature well-substantiated claims that would be of interest to an audience of readers of the business press. The summary should take up between one-quarter and one-third of your total response.
SEC Proposes Loosening of Auditor Independence Rules
The U.S. Securities and Exchange Commission on Monday proposed changes to auditor independence rules that would relax regulation of audit firms in cases involving affiliates of their clients and preparations for initial public offerings.
The proposed rule, which has been released for public comment over the next 60 days, represents a potential further loosening of regulation following the June approval of softer rules governing auditors’ and funds’ financial ties to the same lender.
The changes proposed Monday would give auditors more discretion in assessing conflicts of interest in their relationships with companies they audit.
The proposal would alter the definition of affiliates of an audit client, which currently states that the independence rules governing an auditor of a portfolio company also extend to any other portfolio company controlled by the same private fund.
The proposal would build a materiality qualifier into the definition, allowing the auditor to determine if another portfolio company under the fund is material to the fund. If the auditor determines no materiality, it can provide non audit services to that company without compromising its independence.
The different ways auditors assess materiality could lead to variation in analyses.
The Big Four accounting firms’ push into consulting to boost revenues has been the subject of scrutiny in recent years. U.K. regulators, for example, have proposed an operational split between accounting firms’ audit and consulting businesses. A parliamentary committee also suggested new legislation that would introduce a structural separation between audit and consulting businesses.
The SEC proposal would also shorten the period during which U.S. companies planning to go public ensure their auditor’s independence before an IPO. The proposal would change the time frame, known as a “look-back” period, from three years to one year for U.S. companies. Non-U.S. companies are currently subject to a one-year requirement for ensuring their auditor’s independence before an IPO.
The proposal would also expand upon the SEC’s recent loan-related changes to auditing rules. Under the proposal, the student loans of certain employees who are involved in or are in a position to influence an audit would no longer be deemed to compromise the independence of the audit firm.
The current rules apply restrictions to those employees who had obtained student loans from an audit client through normal lending procedures before their employment at the firm.
“The proposal is consistent with the Commission’s long-recognized view that an audit by an objective, impartial, and skilled professional enhances both investor protection and market integrity, and, in turn, facilitates capital formation,” SEC Chairman Jay Clayton said in a statement.
The amendments would increase the number of qualified audit firms a company could choose from and permit audit committees and commission staff to better focus on relationships that could impair an auditor’s objectivity and impartiality, Mr. Clayton said.
Mr. Clayton said in December that changes to auditor independence rules were a priority of the regulator in the next year. He also said the audit committee has an especially important role in evaluating independence. The SEC’s office of the chief accountant provided recommendations on additional changes to the auditor-independence rule to the commission.
The agency previously removed a rule that prevented a firm from auditing a fund while also borrowing money from a lender with a stake above a certain threshold in the same fund. The change replaced the threshold with a squishier form of appraisal known as a “significant influence” test, which seeks to determine whether a beneficial owner or loan relationship may impair the auditor’s independence.
Monday’s proposal covers the potential future changes to auditor independence that were mentioned broadly in the loan amendment document. In the devising of the proposal, the SEC reviewed past comments from audit firms on other changes to existing rules.
The SEC has detected several alleged independence violations in recent years involving large accounting firms.
Proposed Changes to Auditor Independence Rules Essay
RUBRIC |
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Excellent Quality 95-100%
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Introduction
45-41 points The background and significance of the problem and a clear statement of the research purpose is provided. The search history is mentioned. |
Literature Support 91-84 points The background and significance of the problem and a clear statement of the research purpose is provided. The search history is mentioned. |
Methodology 58-53 points Content is well-organized with headings for each slide and bulleted lists to group related material as needed. Use of font, color, graphics, effects, etc. to enhance readability and presentation content is excellent. Length requirements of 10 slides/pages or less is met. |
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Average Score 50-85% |
40-38 points More depth/detail for the background and significance is needed, or the research detail is not clear. No search history information is provided. |
83-76 points Review of relevant theoretical literature is evident, but there is little integration of studies into concepts related to problem. Review is partially focused and organized. Supporting and opposing research are included. Summary of information presented is included. Conclusion may not contain a biblical integration. |
52-49 points Content is somewhat organized, but no structure is apparent. The use of font, color, graphics, effects, etc. is occasionally detracting to the presentation content. Length requirements may not be met. |
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Poor Quality 0-45% |
37-1 points The background and/or significance are missing. No search history information is provided. |
75-1 points Review of relevant theoretical literature is evident, but there is no integration of studies into concepts related to problem. Review is partially focused and organized. Supporting and opposing research are not included in the summary of information presented. Conclusion does not contain a biblical integration. |
48-1 points There is no clear or logical organizational structure. No logical sequence is apparent. The use of font, color, graphics, effects etc. is often detracting to the presentation content. Length requirements may not be met |
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Proposed Changes to Auditor Independence Rules Essay |
Proposed Changes to Auditor Independence Rules Essay