Business executives discussing auditor independence rules while reviewing financial statements


Auditor independence rules are regulations set forth by the Securities and Exchange Commission (SEC) and regulated by the Public Company Accounting Oversight Board (PCAOB). The purpose of the independence standards is to ensure auditors maintain objectivity and impartiality when conducting PCAOB audits.


Why are SEC independence rules fundamental to PCAOB auditing?

These rules protect the integrity of the financial statements and public trust in auditors. Auditors and publicly traded companies must adhere to these requirements; otherwise, they would face serious consequences such as sanctions and fines.  


Background on Auditor Independence Rules

The Sarbanes-Oxley Act of 2002 (SOX) is a federal law introduced due to accounting scandals where investors and shareholders lost faith and trust in financial reporting for publicly traded companies. SOX introduced various financial reforms to improve corporate governance, financial transparency, and auditor independence rules. SOX also created the PCAOB, a nonprofit organization with the mission to oversee and regulate auditors of publicly traded companies, protect investors, and ensure financial reliability.

The PCAOB sets the auditing and quality control standards for auditing firms. It conducts inspections of registered firms and enforces compliance with the rules and regulations set by the SEC.  The SEC has various responsibilities, specifically:

  • Investor protection, 
  • Maintaining fair and efficient markets, and 
  • Enforcing securities law. 

These responsibilities provide the SEC with broad authority in the financial reporting of publicly traded companies. They also have the power to establish and enforce auditor independence standards.


Auditor Independence Requirements

Even though the SEC is the primary regulator of securities and financial reporting for publicly traded companies, it relies on the PCAOB’s expertise to ensure registered auditing firms are in compliance with PCAOB auditing standards and auditor independence rules. The SEC prohibits auditors from providing non-audit services to their clients and affiliates, the rules are as follows.:

  • Bookkeeping services;
  • Creating and implementing financial information systems designs;
  • Appraisal or valuation services, fairness opinions, or contribution-in-kind reports;
  • Actuarial services;
  • Internal audit outsourcing services;
  • Management functions or human resources;
  • Broker-dealer, investment adviser, or investment banking services; and
  • Legal services and expert services unrelated to the audit services.

The auditor independence standards also prohibit relationships between auditing firms and their clients, including employment relationships, contingent fees, direct or indirect business relationships, and financial relationships. Rule 3520 of the PCAOB also enhances PCAOB auditor independence throughout the auditing process from beginning to end, while Rule 3521 states that the auditing firm is not independent if it provides a service or product for a contingent fee or commission. 


Consequences of Violating Auditor Independence Rules

Violating the regulations on independent auditing could lead to severe repercussions for the auditing firm and the publicly traded company. Severe repercussions include the following:

  • Auditors and companies may face lawsuits and legal liability led by shareholders or the SEC, resulting in monetary fines and damaging their reputation in the field; 
  • Opinion letters created by the auditing firm may be challenged as their integrity will be questioned; and
  • Companies and auditing firms may also face regulatory sanctions by the SEC. 

It is imperative for companies who need PCAOB audits to adhere to the auditor independence rules as they will contribute to the transparency and objectivity of the financial records. 


Assurance Dimensions: Commitment to Independence

At Assurance Dimensions, we have a commitment to ensure we follow auditor independence rules to the letter. Our registration with the PCAOB ensures we maintain the highest auditing rules and standards for the industries that we serve. We provide comprehensive SEC services, including PCAOB audits, Sarbanes-Oxley (SOX) 404 compliance, and broker dealer audits

Contact us today to help prepare your public company audit.