WEBVTT

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Damien is the lead audit engagement partner for

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Mircher Inc., a private audit client.  Mircher just

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informed Damien that they intend to go public within the

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next few years. Although they haven’t defined the date of

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their IPO, Damien decides to look into relationships and

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services KPMG is providing to see if they could be

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problematic. He meets with Katelyn, a manager on the audit

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engagement team, to talk through next steps.

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Damien: So, now that Mircher has informed us that they intend

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to pursue a public offering, we need to think through

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anything that could cause an independence concern prior to

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them filing their initial registration statement with the SEC.

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Katelyn: I’m surprised they informed us about going public

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this far in advance. 

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Damien: Well, I’m happy they did! When we walked through our shared

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responsibilities before we were engaged for this year’s

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audit, we reiterated Mircher’s role and how they need to

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always timely inform us of upcoming transactions.

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Katelyn: I remember that discussion. You also specifically

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mentioned the importance of early communication of planned IPOs.

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 We don’t need to do anything this far in advance though, right?

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Damien: Actually, we do. First, let’s run a Sentinel service

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history report for the past three years to identify if there

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are any services, fee arrangements or business relationships

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that might not be permissible under the SEC independence rules.

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Katelyn: Why do we need to run it for the last three years? Didn’t

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the SEC change the number of years a private company would

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need to comply with their rules to only the year of the most

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recent audited financial statements included in the

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registration statement? 

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Damien: Yes you’re right about that, but although the SEC

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independence rules are generally only considered for the

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most recent year of audited financial statements, Mircher

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would still need to fully comply with SEC’s general standard

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of independence for all periods included in the initial

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registration statement. 

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Katelyn: Ahh, I didn’t know that. I’ll run the report today.

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Katelyn runs the Sentinel service history report and finds

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ESG tax restructuring services were provided to Mircher last

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year and KPMG is currently providing tax provision

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preparation services to Pondson, LLC., a downstream affiliate

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 of Mircher, Inc. In looking into business relationships,

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she didn’t find any with Mircher or their

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affiliates that would be impermissible under the SEC

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independence rules. Katelyn decides to talk through her

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findings with Damien so they can agree on next  steps.

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Katelyn: I reviewed the Risk Management Manual. The ESG tax

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restructuring services are generally permissible under SEC rules.

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Damien: I appreciate your diligence here and I agree that

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the service would be permissible.

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Katelyn: I also reviewed the practice aid for engagement

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teams working on IPOs that stated tax provision services

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would likely cause issues. They aren’t being provided to

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Mircher, but rather to their downstream affiliate Pondson.

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Damien: Yes, but as a downstream affiliate of Mircher, they would

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still need to adhere to the rules. Providing tax provision

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services during any period included in the initial

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registration statement would not be in compliance with the

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SEC’s general standard.

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Katelyn: That makes sense. Well, then in that case it looks

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like we’ll want to exit those services as soon as possible.

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Damien: I completely agree. If we’re performing these

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services during any year in which Mircher’s financial

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statements will be included in the initial filing, we could

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lose the ability to act as the auditor once Mircher becomes

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public because of non-compliance with SEC’s general standard.

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Katelyn: I’ll reach out to Independence to inform them about

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what’s going on. We may also want to discuss whether to

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apply the “SEC Audit Target” attribute to our Sentinel family

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tree with Independence. This would change from auto-approval

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to manual approval of Sentinel requests, so you’re

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aware of any future service requests associated with Mircher.

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Damien: That’s a great point; I’ll submit a support request

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through the Sentinel Help portal to make that change.

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I’ll also schedule a meeting with the tax engagement team so

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they’re aware of the situation. We’ll have to discuss their

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shared responsibility to maintain independence and the

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process around discontinuing the services as soon as possible.

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Katelyn reached out to the Independence Group and together

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with Damien, they worked with the tax engagement team to

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appropriately discontinue the tax provision preparation services.

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Luckily Mircher, Inc. was aware of the

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importance of informing their auditor about their planned

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IPO well in advance. Because KPMG acted swiftly to exit the

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services and the audit team monitored any future service

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requests in Sentinel for permissibility, the firm was able

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to still serve as Mircher’s auditor after their IPO. Since KPMG

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was compliant with the SEC’s general standard for all

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periods included in Mircher’s registration statement, the firm

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was able to continue to GROW with the client, becoming their

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SEC auditor.

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