Independence: its complicated. Except it isn't, really. Audits firms are conflicted because they're paid by the organizations who they're supposed to be independent of audit clients. Most people, I think, know this yet choose to ignore it. Fine.
However, what people tend to get worked up about is when there's a possibility that a firm has ran afoul of the convoluted independence rules in the securities laws. Today, we have one of those. Going Concern received a tip about PwC having some independence issues with Invesco, Ltd. and hey, here's the 8-K the company filed that has the details:
PricewaterhouseCoopers LLP (“PwC”) has advised Invesco Ltd. (the “Company”) that PwC is in discussions with the Staff of the United States Securities and Exchange Commission (the “SEC”) regarding the interpretation and application of Rule 2-01(c)(1)(ii)(A) of Regulation S-X (the “Loan Rule”) with respect to certain of PwC’s lenders who own interests in closed-end and open-end mutual funds managed by the Company’s wholly-owned investment adviser subsidiaries. The Loan Rule prohibits accounting firms, such as PwC, from having certain financial relationships with their audit clients and affiliated entities.
If you hate reading SEC filings, the jist is this: a bank that lends PwC money also has ownership in some of Invesco's mutual funds. Here's what the "Loan Rule" says:
(ii) Other financial interests in audit client. An accountant is not independent when the accounting firm, any covered person in the firm, or any of his or her immediate family members has:
(A) Loans/debtor-creditor relationship. Any loan (including any margin loan) to or from an audit client, or an audit client's officers, directors, or record or beneficial owners of more than ten percent of the audit client's equity securities
That last part, "record or beneficial owners of more than ten percent of the audit client's equity securities" being the important in this case. Back to the 8-K:
Under the SEC Staff’s interpretation of the Loan Rule, some of PwC’s relationships with lenders who own shares of certain closed-end and open-end funds within the Invesco investment company complex may be in violation of the Loan Rule, calling into question PwC’s independence with respect to such funds, such funds investment advisers and affiliated entities of such investment advisers, including the Company.
PwC’s interpretation of the Loan Rule, in light of the facts of these lending relationships, leads it to conclude that there is no violation of the Loan Rule and its independence has not been impaired. PwC has advised the Company that it continues to have discussions with the SEC’s Staff to resolve this interpretive matter. While PwC represented to the Company that it feels confident that PwC’s interpretation of the Loan Rule is correct, neither PwC nor the Company can be certain of the final outcome.
Invesco also provided a new risk factor related to this situation that would go with the other risk factors it lists in its 10-K and elsewhere. A portion of it rehashes what we've already shared here. The rest of it lays out more background:
The Company’s Audit Committee has considered the lending relationships described by PwC and, based solely upon the representations made by PwC, believes that (1) the lending relationships did not impact PwC’s application of objective and impartial judgment with respect to all issues encompassed within PwC’s audit engagement; and (2) a reasonable investor with knowledge of all relevant facts and circumstances would reach the same conclusion. In making this determination, the Audit Committee considered PwC’s description of the relevant lending relationships, PwC’s interpretation of the Loan Rule, PwC’s representation that this matter has not compromised or impaired its objectivity in connection with its audit or review of any of the financial statements of the Company, and PwC’s representation that it is independent within the meaning of the Public Company Accounting Oversight Board Rule 3520, Auditor Independence.
PwC advised the Audit Committee that it continues to have discussions with the SEC’s Staff to resolve this interpretive matter. While PwC represented to the Audit Committee that it feels confident that PwC’s interpretation of the Loan Rule is correct, neither PwC nor the Audit Committee can be certain of the final outcome.
I think "based solely upon the representations made by PwC" is the operative phrase here. Because if this goes south, and there's nothing in the filing that suggests that it will, Invesco definitely wants it to be PwC's fault:
If the SEC were ultimately to determine that PwC was not independent with respect to the Company, or the Company does not obtain some form of exemptive relief from the SEC, the Company’s previously filed Annual Reports on Form 10-K (including financial statements audited by PwC) and Quarterly Reports on Form 10-Q (including financial statements reviewed by PwC) may not be considered compliant with the applicable securities laws. If the SEC determines that PwC was not independent, or the Company does not receive some form of exemptive relief from the SEC, among other things, the financial statements audited by PwC and the interim financial statements reviewed by PwC may have to be audited and reviewed, respectively, by another independent registered public accounting firm, the Company’s eligibility to issue securities under its existing registration statements on Form S-3 and Forms S-8 may be impacted and certain financial reporting covenants with our lenders may be impacted. Such items could have a material adverse effect on our business, results of operations, financial condition and stock price.
I think the moral of story is that independence doesn't have to be this complicated. PwC had no comment.