Question

In Reg S-X, Rule 2-01, who are "Covered Persons in the Firm"? Why is it important to determine whether you are such a person? Is a firm's independence impaired if a covered person in the firm is not independent? How does the SEC distinguish "immediate family" from "close family"? How do these distinctions impact an auditor's independence?

Answer 1

1- Who are coverd person in the firm? The Commission will not recognize any person as a certified public accountant who is not duly registered and in good standing as such under the laws of the place of his residence or principal office,these persons are called covered persons in the firm.

2- why is it important to determind wheather you are a person?

A “covered person” includes members of the audit engagement team and those in the chain of command, as well as any other partner, principal, shareholder or managerial employee of the audit firm who has provided 10 or more hours of nonaudit services to the audit client for the current accounting period or on a recurring basis. It also may include another partner, principal or shareholder from an office of the audit firm in which the lead audit partner primarily practices.

3-Is a firm s independence impaired if...........

The Commission's general standard of auditor independence is that an auditor's independence is impaired if the auditor is not, or a reasonable investor with knowledge of all the facts and circumstances would conclude that the auditor is not, capable of exercising objective and impartial judgment on all issues encompassed within the audit engagement. To determine whether an auditor is independent under this standard an audit committee needs to consider all of the relationships between the auditor and the company, the company's management and directors, not just those relationships related to reports filed with the Commission. The audit committee should consider whether a relationship with or service provided by an auditor:

(a) creates a mutual or conflicting interest with their audit client;
(b) places them in the position of auditing their own work;
(c) results in their acting as management or an employee of the audit client; or
(d) places them in a position of being an advocate for the audit client.

4- How does the SEC distinguish, immidiate family.......................

The immediate family is a defined group of relations, used in rules or laws to determine which members of a person's family are affected by those rules. It normally includes a person's parents, siblings, spouses, children, or an individual related by blood whose close association is an equivalent of a family relationship. The concept of "immediate family" acknowledges that a person has or may feel particular responsibilities towards family members, which may make it difficult to act fairly towards non-family .

Close Family Member means the individual's spouse; the individual's and the spouse's grandparents, parents, siblings, children, nieces, nephews, aunts, uncles and first cousins; the spouse of any of these people; and any other individuals who share the same household with the Government Official.Close Family Member means those family members of a particular person who can be expected to exert influence on or be influenced by that person, such as: (a) the children and/or dependents of such person; (b) the spouse or partner of such person; (c) the children and/or dependents of such person's spouse or partner; (d) the inbred ascendants up to the first degree of such person; (e) siblings.

5- How do these distinctions impact an auditor 's independence?

The Securities and Exchange Commission (SEC) recently proposed changes to its auditor independence rules. The proposal targets situations in which auditors are borrowing funds or issuing debt to accumulate working capital. Here’s why auditor independence is important and how the SEC plans to alleviate some of the recordkeeping challenges associated with the existing rules.

The SEC’s existing rules on auditor independence impose a significant recordkeeping challenge. The SEC wants to refine the broad criteria for evaluating debtor-creditor relationships so that auditors and their clients face less of a challenge complying with the rules. We’re monitoring the status of this proposal, which will be subject to a 60-day comment period after it’s published in the Federal Register. In the meantime, feel free to contact us with questions about the auditor independence rules for public or private companies.