SEC Proposed New Rules for Independent Auditors

New Definitions and Rules to Measure Independence, New Restrictions

By John M. Baker, Esq.

On June 30, 2000 the SEC posted proposed rules that would substantially revise the independence standards for auditors. Release Nos. 33-7870, 34- 42994, 35-27193, IC-24549 (June 30, 2000).

The proposal would modernize the rules for auditor independence primarily in three areas: (1) investments by auditors or their family members in audit clients; (2) employment relationships between auditors or their family members and audit clients; and (3) the scope of services provided by the audit firms to their audit clients.

The release articulates four principles by which to measure an auditor’s independence. An accountant is not independent when the accountant (1) has a mutual or conflicting interest with the audit client, (2) audits his or her own work, (3) functions as management or an employee of the audit client, or (4) acts as an advocate for the audit client.

The restrictions on individual auditors, which would narrow significantly the circle of people whose investments trigger independence concerns, has broad support. The restrictions on non- audit services, however, will be controversial.

According to The New York Times, Ernst & Young and PricewaterhouseCoopers say they broadly support the SEC’s initiative, while the remaining Big Five firms and the AICPA strongly criticized the proposal.

Comments will be solicited for 75 days after publication in the Federal Register, and the SEC is also planning a series of public hearings. The SEC proposal is available online at

Copyright 2000, John M. Baker, Esq., Stradley, Ronon, Stevens & Young, LLP, 1220 19th Street, N.W., Suite 700, Washington, DC 20036 – (202) 822-9611- Fax (202) 822-0140 This article was originally posted to the FundLaw List, To subscribe to FundLaw, send a blank e-mail to

Nothing herein is intended as legal or financial advice. The law is different in different jurisdictions, and the facts of a particular matter can change the application of the law. Please consult an attorney or your financial advisor before acting upon the information contained in this article.

Securities Attorney at Sallah Astarita & Cox | 212-509-6544 | | Website | + posts

Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.

He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page -, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.