For over a decade, the PCAOB has been unable to fulfill its SOX mandate to inspect audit firms in “Non-Cooperating Jurisdictions,” including China. To address this issue, in May, the Senate passed, by unanimous consent, the Holding Foreign Companies Accountable Act, co-sponsored by Senators John Kennedy, a Republican from Louisiana, and Chris Van Hollen, a Democrat from Maryland. The bill would amend SOX to prohibit trading on U.S. exchanges of public reporting companies audited by registered public accounting firms that the PCAOB has been unable to inspect for three sequential years. Yesterday, the House also passed the bill, with the result that it is now headed to the President for signature. [Update: This bill was signed into law on December 18.] How this bill will affect or interact with the expected proposal on this topic from the SEC (see this PubCo post) remains to be seen.
The bill would amend SOX to impose certain requirements on a public company identified by the SEC as a company that files in its periodic reports financial statements audited by a registered public accounting firm with a branch or office located in a foreign jurisdiction that the PCAOB is “unable to inspect or investigate completely because of a position taken by an authority in the foreign jurisdiction.” The press release from Senator Van Hollen indicates that there are 224 U.S.-listed companies, with a combined market capitalization of more than $1.8 trillion, located in countries where there are obstacles to PCAOB inspections.
Under the bill, the SEC-identified public company would be required, under new rules to be adopted by the SEC within 90 days after enactment, to submit to the SEC documentation that establishes that the company is not owned or controlled by a governmental entity in the foreign jurisdiction. In addition, if the SEC determines that the public company has three consecutive “non-inspection years,” the SEC “shall prohibit the securities of the covered issuer from being traded” on a national securities exchange, over the counter or through any other method within the jurisdiction of the SEC. If, after a prohibition has been imposed, the company then certifies to the SEC that it has retained a registered public accounting firm that the PCAOB has inspected to the satisfaction of the SEC, the SEC is then required to end that prohibition. If, after the prohibition has been removed, there is a recurrence of a non-inspection year, the SEC is required to ban the company again for at least five years. If, after a five-year ban, the company certifies to the SEC that it will retain a registered public accounting firm that the PCAOB can inspect, the SEC must end that prohibition. However, another non-inspection year would be followed by another five-year ban.
During a non-inspection year for a foreign issuer that is required to file reports under the Exchange Act, the foreign issuer would need to disclose in its reports that the PCAOB is unable to inspect its audit firm, the percentage of its shares owned by governmental entities in the jurisdiction where it is incorporated or organized, whether governmental entities in the accounting firm’s jurisdiction have a controlling financial interest in the issuer, the name of each official of the Chinese Communist Party who is on the board of the issuer or the operating entity with respect to the issuer and whether the organizing document of the issuer contains any charter of the Chinese Communist Party.
