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Test bank for SEC enforcement decision in Accounting and Auditing Enforcement Release (AAER) No. 2859 concerned independence-impairing business relationships.  Ernst & Young was ordered to pay disgorgement of $2.4 million and prejudgment interest over $500,000 due to an independence-impairing business relationship between E&Y and Mark Thompson, a member of the board of directors of three of E&Y’s audit clients.  The relationship between E&Y and Thompson involved their collaboration in the creation of audio CDs called “The Ernst & Young Thought Leaders Series.”  Two E&Y partners were ordered to cease and desist from causing any future securities violations.

Other Professional Standards Discussed (AICPA)

The AICPA’s Code of Professional Conduct Rule 101 also requires independence in the performance of professional services provided by its members.  An auditor’s independence is considered impaired if the auditor has a material joint closely held investment with test bank the audit client under ET-INT101-1(A)(3). A “joint closely held investment” is an investment in an entity or property by the member of AICPA and the client’s directors or officers, or any owner who has the ability to exercise significant influence of the client that enables them to control the entity or property.

If the audit partner of a CPA firm holds an investment in a computer side business with a member of the board of directors of a public company of an audit client, his or her independence is considered impaired.  In this situation, the audit client has significant influence over the investment; therefore, the auditor is not independent in test bank is also available.

Assuming that the audit partner in question does not engage in direct audit and review services, if the firm has only two audit partners, then 17 CFR §210.2-01(f)(11), Reg. S-X, Rule 2-01(f)(11) classifies the second partner as a covered person, as he may perform second partner review. Hence, the audit partner may be a covered member in a two-partner registered accounting firm even though he does not engage in direct contact with the audit client for textbook solutions.

The problem exists if the lead partner of the audit client practices in the same office as the audit partner.  If the lead partner who associates with the audit client practices in the same office as the audit partner, the audit partner will be a covered member.  Hence, without contrary evidence to current assumptions, the auditor in question may be a covered person. 

Textbook solutions in addition, as a covered person (the audit partner) has a direct business relationship with the director, it indicates that this direct business relationship impairs the independence of an auditor with respect to the audit client in pursuant to Reg. S-X, Rule 2-01(c)(3).

An auditor must be free from any obligation to or interest in its owners (directors) so that the general public recognizes the auditor as independent for textbook solutions is available. As the audit partner has business interest with the director of the audit client, who has the power to influence the audit client, such as by holding a seat in audit committee, 

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