Damien is the lead audit engagement partner for
Mircher Inc., a private audit client. Mircher just
informed Damien that they intend to go public within the
next few years. Although they haven’t defined the date of
their IPO, Damien decides to look into relationships and
services KPMG is providing to see if they could be
problematic. He meets with Katelyn, a manager on the audit
engagement team, to talk through next steps.
Damien: So, now that Mircher has informed us that they intend
to pursue a public offering, we need to think through
anything that could cause an independence concern prior to
them filing their initial registration statement with the SEC.
Katelyn: I’m surprised they informed us about going public
this far in advance.
Damien: Well, I’m happy they did! When we walked through our shared
responsibilities before we were engaged for this year’s
audit, we reiterated Mircher’s role and how they need to
always timely inform us of upcoming transactions.
Katelyn: I remember that discussion. You also specifically
mentioned the importance of early communication of planned IPOs.
We don’t need to do anything this far in advance though, right?
Damien: Actually, we do. First, let’s run a Sentinel service
history report for the past three years to identify if there
are any services, fee arrangements or business relationships
that might not be permissible under the SEC independence rules.
Katelyn: Why do we need to run it for the last three years? Didn’t
the SEC change the number of years a private company would
need to comply with their rules to only the year of the most
recent audited financial statements included in the
registration statement?
Damien: Yes you’re right about that, but although the SEC
independence rules are generally only considered for the
most recent year of audited financial statements, Mircher
would still need to fully comply with SEC’s general standard
of independence for all periods included in the initial
registration statement.
Katelyn: Ahh, I didn’t know that. I’ll run the report today.
Katelyn runs the Sentinel service history report and finds
ESG tax restructuring services were provided to Mircher last
year and KPMG is currently providing tax provision
preparation services to Pondson, LLC., a downstream affiliate
of Mircher, Inc. In looking into business relationships,
she didn’t find any with Mircher or their
affiliates that would be impermissible under the SEC
independence rules. Katelyn decides to talk through her
findings with Damien so they can agree on next steps.
Katelyn: I reviewed the Risk Management Manual. The ESG tax
restructuring services are generally permissible under SEC rules.
Damien: I appreciate your diligence here and I agree that
the service would be permissible.
Katelyn: I also reviewed the practice aid for engagement
teams working on IPOs that stated tax provision services
would likely cause issues. They aren’t being provided to
Mircher, but rather to their downstream affiliate Pondson.
Damien: Yes, but as a downstream affiliate of Mircher, they would
still need to adhere to the rules. Providing tax provision
services during any period included in the initial
registration statement would not be in compliance with the
SEC’s general standard.
Katelyn: That makes sense. Well, then in that case it looks
like we’ll want to exit those services as soon as possible.
Damien: I completely agree. If we’re performing these
services during any year in which Mircher’s financial
statements will be included in the initial filing, we could
lose the ability to act as the auditor once Mircher becomes
public because of non-compliance with SEC’s general standard.
Katelyn: I’ll reach out to Independence to inform them about
what’s going on. We may also want to discuss whether to
apply the “SEC Audit Target” attribute to our Sentinel family
tree with Independence. This would change from auto-approval
to manual approval of Sentinel requests, so you’re
aware of any future service requests associated with Mircher.
Damien: That’s a great point; I’ll submit a support request
through the Sentinel Help portal to make that change.
I’ll also schedule a meeting with the tax engagement team so
they’re aware of the situation. We’ll have to discuss their
shared responsibility to maintain independence and the
process around discontinuing the services as soon as possible.
Katelyn reached out to the Independence Group and together
with Damien, they worked with the tax engagement team to
appropriately discontinue the tax provision preparation services.
Luckily Mircher, Inc. was aware of the
importance of informing their auditor about their planned
IPO well in advance. Because KPMG acted swiftly to exit the
services and the audit team monitored any future service
requests in Sentinel for permissibility, the firm was able
to still serve as Mircher’s auditor after their IPO. Since KPMG
was compliant with the SEC’s general standard for all
periods included in Mircher’s registration statement, the firm
was able to continue to GROW with the client, becoming their
SEC auditor.