Tom is an audit partner for bae and incorporated an
SEC audit client. Tom was recently informed that Bae ins
parent company ponson is expected to acquire stone and CO on
December 1, stone will become a sister affiliate of Bayon.
After the transaction is completed, as both ban and stone
will be material to ponson, Tom is working with rosemary, an
audit manager to identify if there are any independence
impairing services that are being provided to stone and
completing her preliminary review. Rosemary has obtained
access to the Sentinel family tree from the Sentinel lead
partner of stone and has generated the Sentinel service
history report to independence and pairing services were
identified.
It seems that both services will become impermissible after
the effective date of the acquisition. One of the services
can be transitioned to another provider smoothly before
then,
what about the other service? We need to unwind all
independence impairing services before the closing date to
avoid incurring any independence violations?
It's a payroll service that may be very disruptive and
costly to the client to terminate before the acquisition
closing.
Well, provided that certain criteria are met, we may be
allowed to implement the SEC transition framework to
transition out of the service.
I've heard about that framework. Do you have any suggestions
on how I can determine if we'll be able to apply it?
Yes, I'd recommend reviewing chapter 12. In the risk
management manual. It outlines the transition provisions for
mergers and acquisitions. And then after reviewing, please
reach out to independents to confirm since consultation with
them as required in order to implement the framework.
That sounds good. I'll get started on this as soon as I can.
Rosemary started the evaluation process right away by
reviewing chapter 12. In the US risk management manual,
being unfamiliar with the time and attention that may be
required, she reached out to the independence group.
Thanks for reaching out rosemary, the framework can be
applied in limited circumstances. So we'll have to confirm
certain criteria are met by properly bringing the service to
our attention. You've met the requirement to timely identify
the service before the effective date.
That's good to hear. And based on our review of the
services, do you think we would meet the additional
conditions?
Possibly, as it appears that service was permissible prior
to the acquisition? For starters, have you discussed this
payroll service with the team that is currently providing
it?
Yes. And the advisory team notified us that the payroll
filing deadline is shortly after the acquisition date. That
means that it would not be possible to terminate the
relationship prior to the acquisition without causing
significant disruption to the client.
Okay, that's a crucial component of the framework. Yeah, it
sounds like we can move forward. Keep in mind that if the
framework can be applied, the services are expected to be
promptly terminated, but no later than six months after the
effective date of the acquisition. Okay, that's understood.
Your lead audit engagement partner also needs to communicate
the service and the application of the framework to the
clients audit committee.
I'll let the partner know we need to communicate the details
to the audit committee in writing. Thanks for your help.
By acting right away and reaching out to the independence
group regarding transition framework requirements. Rosemary
was able to receive confirmation that the framework could be
applied and services could be transitioned in a way that
causes minimal disruption to the client.