In a public statement issued today, SEC Chair Jay Clayton, Corp Fin Director Bill Hinman, SEC Chief Accountant Sagar Teotia and PCAOB Chairman William D. Duhnke III provided guidance regarding the impact of the coronavirus on financial reporting and audit quality, as well as the potential availability of regulatory relief. The statement arose out of the recent continuing dialogue between these officials and the senior leaders of the largest U.S. audit firms regarding difficulties in connection with conducting audits in emerging markets.
You might recall that, in his statement in connection with the recent issuance of the new MD&A proposal (see this PubCo post), Clayton indicated that he had “asked the staff to monitor and, to the extent necessary or appropriate, provide guidance and other assistance to issuers and other market participants regarding disclosures related to the current and potential effects of the coronavirus.” Although he recognized that the impact might be uncertain and difficult to predict, “how issuers plan for that uncertainty and how they choose to respond to events as they unfold can nevertheless be material to an investment decision.”
This new statement is focused primarily on financial disclosures and audit quality. The officials observe that many companies listed in the U.S. may be affected by the impact of the coronavirus–either because they have significant operations in China (or other affected jurisdictions) or because they may depend on other companies—as customers or through their supply chains—that have significant operations in China (or other affected jurisdictions). During the recent dialogue with audit firm leaders, the SEC and PCAOB officials discussed this potential exposure and
“the impact that exposure could have on financial disclosures and audit quality, including, for example, audit firm access to information and company personnel. This remains a dynamic situation where the effects on any particular company may be difficult to assess or predict, because actual effects may depend on factors beyond the control and knowledge of issuers. However, how issuers plan and respond to the events as they unfold can be material to an investment decision, and we urge issuers to work with their audit committees and auditors to ensure that their financial reporting, auditing and review processes are as robust as practicable in light of the circumstances in meeting the applicable requirements.
“Specifically, we emphasized: (1) the need to consider potential disclosure of subsequent events in the notes to the financial statements in accordance with guidance included in Accounting Standards Codification 855, Subsequent Events and (2) our general policy to grant appropriate relief from filing deadlines in situations where, in light of circumstances beyond the control of the issuer, filings cannot be completed on time with appropriate review and attention. In addition, if issuers have questions regarding the reporting of matters related to the potential effects of the coronavirus, including potential subsequent event disclosure, we welcome engagement on these matters.”
(For example, the SEC has previously provided relief following hurricanes.)
The statement encourages companies and their advisors to contact SEC staff regarding any need for relief or guidance and indicates that the staff will continue to monitor the situation and determine if additional guidance or relief (which, depending on the circumstances, may be case by case or broader) is warranted.