SEC Flashcards
Financial Reporting Oversight Role (FROR)
A role in which a person is in a position to or does exercise influence over the contents of the F/S or anyone who prepares them. Examples: director, CEO, president, CFO, COO, general counsel, CAO, controller, director of internal audit, director of financial reporting, treasurer, or any equivalent position.
Audit and Professional Engagement Period
Includes the period covered by any F/S being audited or reviewed (the “audit period”) and the period of the engagement (the “professional engagement period”). The professional engagement period begins at the earlier of when the accountant signs an initial engagement letter or begins the audit and ends when the audit client or the accountant notifies the SEC that the client is no longer the accountant’s audit client.
Close Family Member (CFM)
A person’s spouse, spousal equivalent, parent, dependent, nondependent child, and sibling.
Covered Persons
The following partners, principals, shareholders, and employees of an accounting firm:
1) Audit engagement team- which includes “all partners, principals, shareholders and professional employees participating in an audit, review, or attestation engagement of an audit client, including audit partners and all persons who consult with others on the audit engagement . . . regarding technical or industry-specific issues, transactions, or events” (comparable to AICPA “team”);
2) Chain of command, which includes all persons who: (a) supervise or have direct management responsibility for the audit, including at all successively senior levels through the accounting firm’s chief executive; (b) evaluate the performance or recommend the compensation of the audit engagement partner; or (c) provide quality control or other oversight of the audit (PTIs);
3) Any other partner, principal, shareholder, or managerial employee of the accounting firm who has provided 10 or more hours of non-audit services (NAS) to the audit client for the period beginning on the date such services are provided and ending on the date the accounting firm signs the report on the F/S for the fiscal year during which those services are provided, or who expects to provide 10 or more hours of NAS to the audit client on a recurring basis (10-hour persons); and
4) Any other partner, principal, or shareholder from an “office” of the accounting firm in which the lead audit engagement partner primarily practices in connection with the audit (OPIOs—other partners in the office).
Immediate Family Member (IFM)
A person’s spouse, spousal equivalent, and dependents.
Five Percent Investments
Independence is impaired if any partner, principal, shareholder, or professional employee of the accounting firm (and any of their IFMs or CFMs) owns more than 5% or more of the client’s stock.
Trustee of a Trust
Independence is impaired if the accounting firm or any covered persons or IFMs serve as voting trustees of a trust or executors of an estate containing an audit client’s securities, unless they have no authority to make investment decisions for the trust or estate.
Material Indirect Interests
As with the AICPA Code, accounting firms, covered persons, and their IFMs may not only not have direct financial interests in an audit client (whether material or immaterial), they may not have indirect interests that are material. It is permitted for these persons to own 5% or less of a diversified investment company, even if the company owns some shares of an audit client.
Audit Clients’ Financial Relationships—CPAs are not independent in these cases:
1) Investments by the Audit Client in the Accounting Firm—(a) An audit client has, or has agreed to acquire, any direct investment in the accounting firm, or (b) the audit client’s officers or directors own >5% of the equity securities of the accounting firm.
2) Underwriting—Their firm engages an audit client to act as an underwriter, broker-dealer, market-maker, promoter, or analyst for securities issued by the accounting firm.
