Policy Articles

The SEC’s Auditor Independence Rules

The AIC urges the SEC to clarify the applicability of its auditor independence rules in the private equity context to reduce the detrimental effects on capital formation caused by the current expansive scope of the rules.

The SEC’s auditor independence rules strictly limit accounting firms in both the non-audit services they can provide and the relationships they can have with audit clients. As these rules are applied in the private equity context, however, the combination of the rules’ broad definitions of “accounting firm,” “audit client,” and “affiliate of the audit client” can lead to the application of these independence restrictions across private equity groups and can have implications on selection and retention of accounting firms for both portfolio company and fund audits. In particular, because of the rules’ “up and over” application, an independence issue at a single fund’s portfolio company can needlessly impair an auditor’s independence, causing significant problems for other funds and portfolio companies in the group. The AIC plans to engage further with the SEC on this topic to obtain clarifying relief.