Definition
A cooling-off period is a waiting period between an audit professional's involvement with a client and a move into a role at that client. For issuers, SEC Regulation S-X Rule 2-01(c)(2)(iii)(B) says independence is impaired if a person in a financial reporting oversight role at the issuer was a member of the audit engagement team during the one-year period before the date audit procedures began for the fiscal period that includes the person's first day of employment. Financial reporting oversight roles include the CEO, CFO, controller and chief accounting officer.
Why it matters in an audit or review
Firms track alumni moves into client finance roles because a recent team member who joins the client creates familiarity and self-review threats. Under the AICPA Code, the firm applies the conceptual framework and the specific rules for former firm personnel, and may need to change the engagement team or perform additional review. A partner leaving to be a client's CFO is a high-risk case.
Example
Illustrative: a senior on an issuer's audit team resigns in March to become the client's controller, a financial reporting oversight role. The firm checks whether the senior was on the engagement team during the one-year period before audit procedures began for the fiscal period that includes the start date, and takes the answer to the independence partner before the next audit begins.
Common mistakes
Counting only partners. The SEC rule and AICPA analysis look at team members and their roles at the client.
Sources
- SEC, Regulation S-X, 17 CFR 210.2-01(c)(2)(iii)(B) and (f)(3)(ii), https://www.law.cornell.edu/cfr/text/17/210.2-01
- AICPA Code of Professional Conduct, independence interpretations on former firm personnel (ET 1.277) and ET 1.210.010, Conceptual Framework for Independence
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error