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3 Quick Tips: The Auditor Independence Loan Rule

Micah McGill
3/23/17 6:15 AM

Mutual funds. Partners. Beneficiaries. The Auditor Independence Loan Rule. I've spoken with partners and managers in several accounting firms and one theme pops up every time. How can organizations effectively manage their independence with this rule?

The Loan Rule restricts audit firms and their partners from having a loan from a lender that is a 10% owner of one of the firms audit clients. Visit the SEC for a comprehensive definition of the Loan Rule.Auditor Independence Loan Rule

The ability to track who's coming and going as a beneficiary is difficult to follow. Millions of transactions take place with shareholders changing hands every second. You're violating the Loan Rule if a partner is auditing Vanguard, for example, and the company you have a loan from also has a 10% stake in Vanguard. With the 10% beneficiary amount constantly changing, this confounds the situation.  

Let's take a closer look at three areas that may help.  

Data helps you understand relationships

Data is needed to understand those relationships and which lenders own more than 10% interest in your audit clients.  You could run to your closest and trusted data vendor. You'll get lots of data. The problem is that you'll have to mine through all that data on your own and you won't know the quality of the data until you've spent a copious amount of time with it. By that time, you could've missed a new beneficiary designation for one of your audit clients.  

Another complexity of the Loan Rule - and Independence overall - is accounting for the family tree. Understanding the relationships among companies along with the rules governing the Loan Rule add to the complexity.  WIth all of this complexity, what have you been doing to gather the data?  We have been looking to unleash our cognitive computing platform to begin to extract the data.

Automation helps manage the process

Once you have the data, you will need to implement a system to check the 10% owners against managers and partner loans. The Loan Rule becomes difficult to manage when you have, for example, hundreds to thousands of partners. A manual process that tracks every loan - boat, car, home - for restrictions would take much longer than an automated system. Kingland clients use a Personal Independence solution that does this checking automatically as new data is entered into the system. This is a more automated way than manually reviewing loans from managers and partners to understand if the loan is permitted. For example, clients are notified in real time if they're in violation. 

Clear communication helps the internal reporting process

What's your internal reporting process? Whether it be a system that is doing the checking or a manual process, once a violation is found, reporting and discipline are the next actions. The Kingland Solution has these functions for ease of use and tracking, which means managers and partners can be clearly communicated with about potential violations. 

These are just a few aspects to staying in front of the Auditor Independence Loan Rule, which is expected to be a compliance challenge for public accounting firms. What are you doing to stay compliant with the Loan Rule? 

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