Title II: Auditor Independence

To meet the title ii: auditor independence requirement, you must keep your external auditor independent by prohibiting conflicted non-audit services, enforcing audit partner rotation, requiring audit committee pre-approval for permitted services, and blocking employment/financial relationships that impair independence (Pub. L. 107-204). Operationalize it by hardwiring independence checks into procurement, AP, legal, HR, and audit committee workflows.

Key takeaways:

• Treat auditor independence as a cross-functional control set, not an “audit-only” policy (Pub. L. 107-204).
• Build preventative controls: service gating, pre-approval, and conflict screening before any spend or engagement starts (Pub. L. 107-204).
• Keep defensible evidence: approvals, service classifications, confirmations, and exception handling aligned to audit cycles (Pub. L. 107-204).

Title II of the Sarbanes-Oxley Act is the independence “guardrail” around your external audit. It exists to prevent your auditor from auditing their own work, advocating for management, or becoming financially or personally entangled with the company in ways that compromise objectivity (Pub. L. 107-204). For a Compliance Officer, CCO, or GRC lead, the practical problem is rarely the statute itself; it’s making independence real in day-to-day operations where work gets done through third parties, purchase orders, SOWs, change orders, and informal “can you also help us with…” requests.

Operationalizing this requirement means you define what services are prohibited, route what is allowed through audit committee pre-approval, and put controls in front of spend so the business cannot accidentally create an independence violation. You also need a clean evidence trail that shows who approved what, on what basis, and when, plus proof that the auditor (and covered persons) confirmed independence at the right times (Pub. L. 107-204).

This page focuses on execution: applicability, step-by-step controls, required artifacts, audit questions, common mistakes, and an execution plan you can run with immediately, using the primary SOX source text and SEC SOX spotlight as your external references (Pub. L. 107-204; SEC SOX spotlight).

Regulatory text

Regulatory excerpt (provided): “Sarbanes-Oxley Act Title II: Auditor Independence obligations.” (Pub. L. 107-204)

Operator interpretation of what the law is driving you to do:
Title II requires your organization to maintain the independence of the registered public accounting firm that performs the audit of your financial statements. In practice, that means you must:

1. Prohibit certain non-audit services by the external auditor to the audit client because they create self-review or advocacy conflicts (Pub. L. 107-204).
2. Require audit committee oversight and pre-approval of permitted audit and non-audit services to prevent “scope creep” into conflicted work (Pub. L. 107-204).
3. Enforce audit partner rotation and related engagement governance so long-tenured relationships do not erode objectivity (Pub. L. 107-204).
4. Control employment/relationship conflicts, such as when a company hires certain former audit firm personnel into financial reporting oversight roles, or other relationships that impair independence (Pub. L. 107-204).

Plain-English requirement:
Your auditor can audit you, or consult for you, but only inside strict boundaries and under audit committee control. Your job is to put gates in place so the business cannot buy conflicted services from the audit firm (or its affiliates) and cannot create people/relationship conflicts that make the audit opinion vulnerable (Pub. L. 107-204).

Who it applies to (entity and operational context)

Entities

• Public companies / issuers subject to SOX reporting and external audit requirements (Pub. L. 107-204; SEC SOX spotlight).
• Audit committees (or boards acting as the audit committee) with responsibility for auditor engagement oversight and approvals (Pub. L. 107-204).
• Finance, controllership, and internal audit functions that manage the audit relationship and coordinate evidence (SEC SOX spotlight).
• Third parties involved in the audit ecosystem: the external audit firm, its affiliates, and any subcontractors it uses (Pub. L. 107-204).

Operational contexts where independence breaks in real life

• Procurement buys “advisory” work from the audit firm under vague line items (Pub. L. 107-204).
• Finance asks the audit team to help design controls, draft accounting memos, or implement systems in a way that crosses into management responsibilities (Pub. L. 107-204).
• HR recruits from the audit firm into controller/CFO/CAO roles without a conflict check tied to the audit engagement (Pub. L. 107-204).
• AP pays invoices from the audit firm’s affiliate or a differently named entity, bypassing normal approval logic (Pub. L. 107-204).

What you actually need to do (step-by-step)

Below is a practical build you can run as a CCO/GRC lead. Adjust ownership to match your governance model, but keep the gates.

1) Define independence boundaries as “service categories” the business can understand

Create a service taxonomy for the external auditor and its affiliates:

• Audit services (financial statement audit, reviews)
• Audit-related services (agreed-upon procedures, comfort letters, diligence support that is permissible)
• Tax services (some may be permissible; treat as higher scrutiny)
• Prohibited non-audit services (explicitly blocked)
• Other advisory/consulting (default to “requires audit committee pre-approval” until classified)

Write it as a one-page standard plus an appendix mapping examples to categories. The goal is consistent classification and defensible pre-approval (Pub. L. 107-204).

2) Put an “independence gate” in front of spend and engagement intake

Implement a required workflow for any engagement with:

• The external audit firm,
• Any affiliate of the audit firm,
• Any subcontractor proposed by the audit firm.

Minimum gating questions:

• Is this entity part of the audit firm network?
• What service category is being requested?
• Is it prohibited?
• If permitted, has the audit committee pre-approved it?
• Does the engagement create any management responsibility risk (drafting, decision-making, operating controls) that would impair independence?

Mechanically, embed this in procurement intake, contract review, and PO creation, so requests cannot proceed without classification and approval evidence (Pub. L. 107-204).

3) Operationalize audit committee pre-approval (make it routable and auditable)

Define:

• Approval thresholds and routing (e.g., chair vs full committee) as your governance dictates.
• Pre-approval package requirements: scope, service category, fees, term, independence assessment, and why the work is permissible.
• Standing pre-approvals only if tightly scoped and time-bounded in your own governance language.

Then run approvals through a system that produces immutable minutes/approvals (board portal, GRC workflow, or controlled repository) (Pub. L. 107-204).

4) Enforce partner rotation and engagement governance

Build a control that:

• Tracks lead audit partner and reviewing partner assignment,
• Records rotation due dates and confirms rotation occurred,
• Captures audit firm communications or confirmations that rotation requirements have been met (Pub. L. 107-204).

Even if the audit firm “owns” rotation, you must be able to evidence oversight.

5) Build HR and Finance conflict controls (employment and relationship checks)

Implement a targeted conflict check for roles that influence financial reporting (controller, CFO, CAO, head of SEC reporting, key accounting policy roles). At minimum:

• HR flags candidates hired from the external audit firm (or its affiliates).
• Finance/Legal reviews whether the candidate was on the engagement team or in a position that raises independence issues.
• Document the conclusion and any cooling-off or role-scope restrictions required by your independence analysis (Pub. L. 107-204).

6) Monitor and test: treat independence as an ICFR-adjacent compliance control

At a minimum, run periodic monitoring:

• Reconcile all payments to the audit firm network against the approved services register.
• Sample engagements to confirm service classification and audit committee pre-approval evidence exists.
• Confirm annual/periodic auditor independence representations are received and retained (Pub. L. 107-204).

Daydream tip (practical, not theoretical): many teams track approvals in email and fail at evidence. Daydream can serve as the system of record for (1) service classification, (2) approval workflows, (3) evidence standards per control, and (4) deficiency tracking with owners and closure validation, which maps cleanly to SOX operating discipline expectations (Pub. L. 107-204).

Required evidence and artifacts to retain

Use an evidence checklist that mirrors how an auditor tests controls: inputs, approvals, outputs, and exceptions.

Core artifacts

• Auditor independence policy / standard and service taxonomy (Pub. L. 107-204).
• Audit committee pre-approval policy and delegated authority matrix (Pub. L. 107-204).
• Audit committee minutes and/or pre-approval resolutions for each permitted non-audit service (Pub. L. 107-204).
• Engagement register for audit firm and affiliates: scope, dates, service category, approver, and link to contract/SOW (Pub. L. 107-204).
• Annual/periodic independence confirmations from the audit firm (Pub. L. 107-204).
• Partner rotation tracking log and confirmations (Pub. L. 107-204).
• AP/procurement reconciliation showing payments align to approved engagements (Pub. L. 107-204).
• HR conflict check records for hires into financial reporting oversight roles from the audit firm network (Pub. L. 107-204).
• Exception register: what happened, who approved remediation, and how recurrence is prevented (Pub. L. 107-204).

Common exam/audit questions and hangups

Expect these lines of questioning in SOX and financial statement audit environments (SEC SOX spotlight; Pub. L. 107-204):

1. “Show me your complete population of services purchased from the audit firm and its affiliates.”
   Hangup: affiliates paid through different vendor records.

2. “For each non-audit service, show audit committee pre-approval and classification rationale.”
   Hangup: approvals exist but do not match the exact scope or dates in the SOW.

3. “How do you prevent prohibited services from being requested or delivered?”
   Hangup: policy exists, but no procurement gating control.

4. “How do you address former-auditor hires into finance leadership roles?”
   Hangup: HR process is not connected to SOX/audit governance.

5. “Who owns independence monitoring, and how do you test it?”
   Hangup: unclear control ownership and review cadence, which becomes a repeatable finding risk (Pub. L. 107-204).

Frequent implementation mistakes and how to avoid them

Mistake	Why it fails	Fix
Treating independence as an annual checklist	Violations usually happen mid-year through ad hoc requests	Put gates in procurement/AP and require pre-approval before SOW issuance (Pub. L. 107-204)
Missing audit firm affiliates	Payments slip through under different payees	Maintain an “audit firm network list” and match payees to it during AP review (Pub. L. 107-204)
Over-broad standing pre-approvals	Scope creep turns permitted work into prohibited work	Force scoped pre-approvals with clear deliverables and time bounds (Pub. L. 107-204)
Weak evidence (email-only approvals)	Auditors need durable, complete audit trails	Use a controlled repository or workflow tool; standardize evidence bundles (Pub. L. 107-204)
HR not included	Independence can be impaired by hiring decisions	Add a finance leadership hiring checkpoint tied to auditor independence (Pub. L. 107-204)

Enforcement context and risk implications

No public enforcement cases were provided in the source catalog for this requirement, so this page does not list specific actions or penalties. Practically, independence failures create audit risk: the external auditor may need to reassess independence, which can disrupt audit timelines and increase scrutiny from stakeholders and regulators (SEC SOX spotlight; Pub. L. 107-204). Treat this as a governance control with real reporting and reputational implications, not a paperwork exercise.

A practical 30/60/90-day execution plan

You asked for speed. Here is a plan you can execute without making up artificial timelines for audit cycles.

First 30 days (stabilize and stop new risk)

• Name owners: audit committee liaison (Finance), process owner (GRC/Compliance), procurement control owner, HR control owner (Pub. L. 107-204).
• Publish a one-page independence standard plus the service taxonomy and “prohibited vs requires pre-approval” rule (Pub. L. 107-204).
• Implement an interim gate: require Compliance/Finance sign-off before any new audit-firm-related SOW/PO is issued (Pub. L. 107-204).
• Start the engagement register: list all active audit firm engagements and known affiliates (Pub. L. 107-204).

Days 31–60 (build durable workflows and evidence)

• Move from interim sign-off to a formal workflow inside procurement intake (Pub. L. 107-204).
• Implement audit committee pre-approval templates and a board-portal or controlled repository process for decisions (Pub. L. 107-204).
• Add AP matching: reconcile payees against the audit firm network list and tie invoices to approved engagements (Pub. L. 107-204).
• Add HR checkpoint for finance leadership roles and document conflict checks (Pub. L. 107-204).

Days 61–90 (monitor, test, and harden)

• Run a monitoring cycle: payments-to-approvals reconciliation and exception handling (Pub. L. 107-204).
• Test a sample of engagements end-to-end (request → classification → pre-approval → contract → invoice) and fix gaps (SEC SOX spotlight).
• Stand up deficiency tracking with severity grading, owners, and closure validation before quarter-end support activities (Pub. L. 107-204).
• If you use Daydream, map each control to required evidence and automate reminders, attestations, and exception workflows so control operation is consistent across quarters (Pub. L. 107-204).

Frequently Asked Questions

Do we need audit committee pre-approval for every service from the external auditor?

You need a clear governance rule that routes permitted services through audit committee oversight and pre-approval consistent with Title II expectations (Pub. L. 107-204). Most teams implement “default to pre-approval” for anything not clearly part of the audit scope.

How do we handle the audit firm’s affiliates and differently named entities in accounts payable?

Maintain a current list of the audit firm network entities you do business with, and match AP vendor records and payees to that list before payment (Pub. L. 107-204). Your evidence should show invoices tie back to an approved engagement and service category.

Can the external auditor help design or implement internal controls or financial systems?

Treat this as a high-risk area because it can create self-review or management participation concerns under auditor independence principles in Title II (Pub. L. 107-204). If anything beyond audit scope is requested, route it through service classification and audit committee pre-approval, and document why it is permissible.

What evidence do auditors usually ask for first?

Expect requests for the non-audit services register, audit committee pre-approvals and minutes, and proof that payments align to approved engagements (Pub. L. 107-204). Many audits also ask for periodic independence confirmations from the audit firm (Pub. L. 107-204).

Who should own the auditor independence controls: Compliance, Finance, or Internal Audit?

Finance typically owns the audit relationship, but Compliance/GRC should own the control framework, evidence standards, and monitoring cadence (SEC SOX spotlight). Internal Audit can test operating effectiveness, but ownership should sit with the teams that execute the workflows (Pub. L. 107-204).

We already have an independence policy. Why do we still get findings?

Policies fail when procurement, AP, and HR processes do not enforce them. Add gating controls, required pre-approval evidence, and exception tracking so independence is prevented by process, not remembered by people (Pub. L. 107-204).