Because the SEC’s and PCAOB’s independence rules are generally more restrictive than the AICPA’s, both the auditor and management, with oversight from the audit committee, need to determine (1) whether there is possible noncompliance with the SEC’s and PCAOB’s independence rules, (2) whether there are conflicts of interest before the entity undertakes an IPO or a transaction involving a SPAC, or (3) both. For example, because certain nonattest services that the auditor is permitted to provide under the AICPA’s rules may be prohibited under the SEC’s independence rules, the auditor and management need to evaluate whether the nonattest services provided during the financial statement periods included in the registration statement (or services approved by the audit committee but not yet provided), are permitted under the SEC’s and PCAOB’s independence rules.2 In addition, the auditor may need to be independent of other entities, individuals, or both, that meet the definition of an affiliate of the entity under audit3 in accordance with the SEC’s independence rules but would not be considered an affiliate under the AICPA’s independence rules. For instance, while controlling entities are within the scope of both the SEC’s and AICPA’s definitions of an affiliate, the SEC’s definition does not allow for materiality considerations related to the determination of whether an upstream controlling entity is an affiliate while the AICPA’s definition does. Therefore, an entity not previously considered an affiliate under the AICPA’s independence rules may meet the definition of an affiliate under the SEC’s independence rules. In addition, the SEC’s general standard of independence requires the auditor to consider relationships with, or services provided to, a nonaffiliate entity that is under common control with the entity under audit (i.e., one or both entities are not material to the controlling entity).
For first-time filers and when a target entity is included in a SPAC’s filing, PCAOB and SEC independence is required for the most recent full fiscal year’s financial statements included in the initial filing and any other subsequent unaudited interim periods. Any earlier periods included in the filing must comply with AICPA independence rules and the SEC general standard of independence. Accordingly, all periods of the filing need to be considered and evaluated under SEC and PCAOB independence rules.
Entity whose financial statements or other information is being audited.