Tom is an audit partner for Bayyen Inc., an SEC
audit client. Tom was recently informed that Bayyen’s parent
company, Pondson, is expected to acquire Stoen & Co. on
December 1st. Stoen will become a sister affiliate of
Bayyen after the transaction is completed (as both Bayyen
and Stoen will be material to Pondson). Tom is working with
Rosemary, an audit manager, to identify if there are any
independence-impairing services that are being provided to
Stoen. In completing her preliminary review, Rosemary has
obtained access to the Sentinel family tree from the
Sentinel Lead Partner of Stoen and has generated the
Sentinel service history report. Two independence-impairing
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. After
reviewing, please reach out to Independence to confirm since
consultation with them is 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 promptly bringing this
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 the 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.
Ok, that’s a crucial component of the framework. 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 client’s
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.