By Pete Schroeder
WASHINGTON (Reuters) - The U.S. securities regulator on Monday proposed updating its auditor independence rules to give accounting firms more leeway when determining potential conflicts of interest that could impair their judgment when scrutinizing companies' books.
The SEC said the proposal would update the rules, which were last reviewed in 2003, to more closely focus the analysis of an auditor's independence on material problems as opposed to "non-substantive" or technical issues that pose no risk to investors.
But the additional leeway could raise concerns from Democrats, who worry the SEC under Chairman Jay Clayton too frequently sides with corporate interests over investors. Clayton has said he prioritizes protecting average investors while encouraging companies to utilize public markets.
Securities rules aim to ensure audit firms are impartial when assessing issuers' books, but consolidation in the global audit industry has resulted in the largest four accountancy firms often having multiple ties with big companies.
The SEC said the proposed changes reflect years of experience assessing auditor independence, with commission staff spending considerable time analyzing loose affiliations which they consistently found pose no impartiality threat.
This is especially the case where a conglomerate may have multiple subsidiaries scattered across the globe whose management have no links to one another.
"The proposed amendments also would increase the number of qualified audit firms an issuer could choose from and permit audit committees and Commission staff to better focus on relationships that could impair an auditor’s objectivity and impartiality," said Clayton in a statement.
The SEC said the proposal, which is subject to a 60-day comment period, aims to update its rules to address corporate complexity with a handful of targeted changes.
Specifically, the agency has proposed amending the definition of an affiliate to focus on substantive relationships between entities, and to take a more relaxed view on ties between the underlying entities of a portfolio company.
Another key change would see the SEC exempt student loans held by audit firm staff from the list of potential conflicts, provided the loans were obtained before that person joined the firm.