April 01, 2020

SEC Auditor Independence Rules

Auditors fulfill an essential function within the securities industry. They keep companies honest, and even when intentional fraud isn’t being committed, they can discover errors and other problems that could eventually get the company into trouble and even destabilize the markets.

Independence is essential for an auditor to successfully perform his or her job, however. When this independence is lost, the auditor can lose objectivity and “overlook” problems and fraud that should have been reported.

Because of this, the Securities and Exchange Commission (SEC) has established rules that dictate what an appropriate auditor-client relationship should look like. These rules forbid scenarios that result in the following situations:

Conflicts of Interest Between Auditor and Client

Auditors must be independent in order to be objective. One of the most common auditor independence violations occurs when an auditor has a conflict of interest that calls his or her objectivity into question.

This most commonly takes the form of a romantic or unusually close and friendly relationship between the auditor and client. If the auditor isn’t thinking about the client as a client, he or she will have a very difficult time performing necessary duties objectively.

Auditors Auditing Their Own Work

The point of an auditor is to provide an outside, impartial set of eyes on the company’s work and records. If an auditor gets put into a position where he or she is auditing his or her own work, that objectivity is lost.

Most people would find it difficult to discover an error they made and then report it rather than simply correcting it or attempting to cover it up. Auditors are as human as the rest of us, so the SEC does not want auditors auditing their own work.

Auditors Acting as Managers or Employees of Clients

An auditor who works for a client cannot be objective. The client is essentially the auditor’s boss in this situation and therefore has all the power in the relationship. Even if the auditor wants to be objective and report errors and problems, he or she might not for fear of termination.

Similarly, an auditor cannot act as a manager for the client. At this point, the auditor is invested in the client’s success, which represents a huge—and obvious—conflict of interest.

Auditors Who Advocate for Clients

An auditor cannot act as an advocate for a client. Advocacy makes it immediately obvious that the auditor has lost impartiality and is now siding with the client.

If an auditor will advocate for a client’s interests, how can he or she report problems that might go against the client’s interests?

Report an Inappropriate Client-Auditor Relationship

The SEC is interested in investigating inappropriate client-auditor relationships. If you know of one and blow the whistle on it, the SEC might reward you if sanctions in excess of $1,000,000 are recovered.

Contact Meissner Associates today to discover if your tip would result in a whistleblower reward. To get started with a free, confidential tip evaluation, just call 1-866-764-3100 or complete the form below.