(Photo: Shutterstock)

The Securities and Exchange Commission on Monday proposed changes that would ease up certain auditor independence rules regarding affiliates of audit clients and the preparation of initial public offerings.

The proposed amendments were designed to “codify certain staff consultations and modernize certain aspects of its auditor independence framework” that have been in place for almost two decades, the SEC pointed out in its announcement.

One key amendment would be a change in the definition of the term “audit client” in Rule 2-01. That rule was “designed to ensure that auditors are qualified and independent of their audit clients both in fact and in appearance,” the SEC noted in the proposed amendments posted on its website.

The SEC is proposing that certain paragraphs within that rule be changed to, among other things, “distinguish how the definition” of an affiliate “applies when an accountant is auditing a portfolio company, an investment company, or an investment adviser or sponsor,” it said.

The public will be able to comment on the proposed amendments for 60 days, the SEC said.

The proposed changes would update select aspects of the auditor independence rules to “more effectively structure the independence rules and analysis so that relationships and services that would not pose threats to an auditor’s objectivity and impartiality do not trigger non-substantive rule breaches or potentially time consuming audit committee review of non-substantive matters,” the SEC said.

The proposed amendments are “based on years of Commission staff experience in applying our auditor independence rule set and respond to recent and longer term feedback received from a wide range of market participants,” according to SEC Chairman Jay Clayton.

“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,” he said in a statement.

Clayton added: “In practice, 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.”

The auditor independence framework was first adopted in 2000 and revisions were made in 2003, the SEC noted.

But, since then, “there have been significant changes in the capital markets and those who participate in them,” the SEC said. The proposed amendments mainly “focus on fact patterns presented to Commission staff through consultations that involve a relationship with, or services provided to, an entity that has little or no relationship with the entity under audit, and no relationship to the engagement team conducting the audit,” it explained.

More details on the SEC’s proposed changes can be found here.

The SEC also posted a fact sheet on its site giving examples that illustrate some of the concerns that firms have with the current rules that the proposals would address.