Carla, a managing director on the Archerton
engagement team, is discussing quarterly Sentinel family tree
updates with Anthony, a manager on the team. Archerton LLC,
an SEC audit client, is controlled by The Redstone Group.
Prior to their meeting, Redstone had notified the team that
their acquisition of Sandstead Inc. is about to close.
Let’s listen in as Carla and Anthony discuss the situation.
Anthony: Because of Redstone’s upcoming acquisition, I’ll
add Sandstead as a sister affiliate on Archerton’s Sentinel
family tree upon closing.
Carla: Before we update the tree though, we need to
determine if Sandstead is an affiliate. The SEC released
guidance amending the definition of an affiliate of an audit
client, which may impact how we add the entity to Archerton’s
Sentinel family tree.
Anthony: How so?
Carla: Well, the amended rules revised the considerations in
determining whether Sandstead is an affiliate of Archerton.
Anthony: Hm, what kind of considerations?
Carla: We would now need to calculate the materiality of
Archerton and Sandstead to Redstone. Sandstead will only be
an affiliate of Archerton if they both are individually
material to Redstone.
Anthony: Okay, I’ll confirm the materiality of these
entities and get back to you.
Anthony determines that Archerton is material to Redstone,
but Sandstead isn’t. So based on prior knowledge of
maintaining Sentinel family trees, he will not add Sandstead
to Archerton’s tree. However, he recognizes that since the
definition of an affiliate has changed, there may be
additional considerations.
There may be independence implications if the appropriate
steps aren’t taken. Let’s see what he decides to do.
Independence: Thanks for sending your inquiry to
Independence! I’ve reviewed the information you provided, and
you’re correct. Sandstead isn’t an affiliate-- at least not
right now. However, you’ll need to include it on Archerton’s
Sentinel family tree.
Anthony: Really? But wouldn’t that suggest that Sandstead is
an affiliate of Archerton, even though that’s not the case?
Independence: That’s a good question. Although they’re
linked, you would add Sandstead to the tree using the “non-affiliate”
entity type. This is signified by the letters NA,
to indicate it’s a non-affiliate entity.
Anthony: But why would non-affiliate sister entities need to be
on the tree?
Independence: This is so your team can monitor these
entities, especially if they’re close to the materiality
threshold. We also want to be aware of new service requests
because they’ll have to be reviewed against the SEC's
general standard.
Anthony: How do we do that?
Independence: Well we’ll need to take a step back—is it
reasonably possible that a proposed service could directly
or indirectly impact our ability to be objective and
impartial in performing our audit?
Anthony: Do we need to ask this question of all
relationships and service requests even though they aren’t an affiliate?
Independence: Oh yes, we do. Understanding these
considerations is important in reviewing services and
relationships against the SEC’s general standard.
Anthony: Oh, okay so that’s why we need to keep these
entities linked in our client’s Sentinel family tree. I’m glad
I reached out because based on my experience, I was under
the impression that they should be left off.
Independence: That’s correct, it’s critical to accurately
maintain Sentinel family trees to evaluate independence
limitations. Incorrectly omitting entities may have serious
ramifications down the road, especially because our
professionals rely on the accuracy of these trees when
analyzing a service for permissibility.
Anthony: I hadn’t thought about the implications for other
engagement teams. This was definitely a learning experience
to ask for help when I’m not 100% sure.
Independence: Absolutely, you can always contact us for
guidance. Because entities are constantly changing, you need
to continuously monitor Sandstead for changes to materiality.
When assessing the completeness and accuracy of
the Sentinel family tree in connection with each interim review,
you should consider whether there have been changes
to materiality that may impact your affiliate conclusions.
After consulting with Independence, Anthony adds Sandstead
Inc. as a sister entity with the appropriate NA
entity type within the Sentinel family tree. This action
allows the team to continue to monitor service requests and
any changes to materiality, remaining independent of the
audit client.