In this new Statement, a number of SEC and PCAOB officials—SEC Chair Jay Clayton, PCAOB Chair William D. Duhnke III, SEC Chief Accountant Sagar Teotia, Corp Fin Director William Hinman and Investment Management Director Dalia Blass—discuss the risks and exposures of companies based, or with significant operations, in emerging markets, for both U.S. issuers and foreign private issuers. Although the SEC is committed to high-quality disclosure standards, its ability to enforce these standards in emerging markets is limited and is “significantly dependent on the actions of local authorities” and the constraints of “national policy considerations.” As a result, in many emerging markets, “there is substantially greater risk that disclosures will be incomplete or misleading and, in the event of investor harm, substantially less access to recourse, in comparison to U.S. domestic companies.” The Statement is summarized below. The message is that, notwithstanding similarity in form and appearance between disclosures from U.S. domestic companies and disclosures from or related to emerging markets, disclosures from emerging markets may well differ in scope and quality and companies need to provide appropriate risk disclosure in that regard.
Recently, both CFO Research and PwC conducted surveys of finance executives to elicit information about how they were navigating the economic crisis resulting from the COVID-19 pandemic. Not surprisingly, their responses indicated concerns regarding the effect on revenues of a compelled decline in economic activity—projections from The Conference Board indicate a sharp contraction in the U.S. economy in 2020 between 3.6% and 7.4%—as well as liquidity pressures. The results may provide some insights for purposes of disclosure and financial reporting. Remarkably, perhaps, there was a hint of optimism about a potential recovery (or were they just putting on happy faces)?
SEC Chief Accountant Sagar Teotia today issued a Statement on the Importance of High-Quality Financial Reporting in Light of the Significant Impacts of COVID-19, which stressed the importance of continuing to provide high-quality financial information for investors and other stakeholders in these uncertain times. In his statement, among other topics, Teotia addressed estimates and judgments as well as temporary relief provided under the CARES Act that allows banks and other financial institutions to suspend compliance with two provisions of GAAP, including CECL. Teotia emphasized that the Office of Chief Accountant is available for consultation and encouraged companies and others with questions as a result of COVID-19 to contact OCA.
Today, the staff of Corp Fin issued Disclosure Guidance Topic No. 9, which offers the staff’s views regarding disclosure considerations, trading on material inside information and reporting financial results in the context of COVID-19 and related uncertainties. The guidance includes a valuable series of questions designed to help companies assess, and to stimulate effective disclosure regarding, the impact of the coronavirus. As always these days, the guidance makes clear that it represents only the views of the staff, is not binding and has no legal force or effect.
SEC adopts carve-out from the auditor attestation requirement of SOX 404(b) for low-revenue companies
On March 12, the SEC voted (by a vote of three to one, with Commissioner Allison Lee dissenting) to approve amendments to the accelerated filer and large accelerated filer definitions to provide a narrow carve-out for companies that qualify as smaller reporting companies (SRCs) and reported less than $100 million in annual revenues in the most recent fiscal year for which audited financial statements were available. Most significantly, under the final amendments, companies qualifying for the carve-out will no longer be subject to the SOX 404(b) requirement to have an auditor attestation report on internal control over financial reporting (ICFR), a requirement that applies to accelerated and large accelerated filers. In adopting these amendments, the SEC said that the amendments will “more appropriately tailor the types of issuers that are included in the definitions, thereby reducing unnecessary burdens and compliance costs for certain smaller issuers while maintaining investor protections. The amendments are consistent with the Commission’s and Congress’s historical practice of providing scaled disclosure and other accommodations to reduce unnecessary burdens for new and smaller issuers.” The new rules will become effective 30 days after publication in the Federal Register.
On Monday, without an open meeting, the SEC voted, with a dissent from Commissioner Allison Lee, to adopt final amendments to Rules 3-10 and 3-16 of Reg S-X. Part of the SEC’s Disclosure Effectiveness Initiative, the amendments are designed to streamline and modernize the financial disclosure requirements applicable to registered debt offerings that involve guaranteed or collateralized securities, such as subsidiary guarantees. According to the press release, the “changes are intended to both improve the quality of disclosure and increase the likelihood that issuers will conduct debt offerings on a registered basis. The amended rules focus on the provision of material, relevant, and decision-useful information regarding guarantees and other credit enhancements, and eliminate prescriptive requirements that have imposed unnecessary burdens and incentivized issuers of securities with guarantees and other credit enhancements to offer and sell those securities on an unregistered basis.” According to the SEC, by improving disclosure and reducing the compliance burden, the final amendments may encourage issuers “to offer guaranteed or collateralized securities on a registered basis, thereby affording investors protection they may not be provided in offerings conducted on an unregistered basis.” The rules will apply to several categories of issuers, including foreign private issuers, smaller reporting companies and issuers offering securities pursuant to Reg A. The changes were originally proposed in July 2018. (See this PubCo post.) The amendments will become effective on January, 4, 2021, but voluntary compliance will be permitted in advance of the effective date.
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.
In December, the PCAOB posted a report on the results of its 2019 conversations with almost 400 audit committee chairs, focused on audit committee perspectives on audit quality assessment and improvement, auditor communications, new auditing and accounting standards, and technology and innovation. Valuably, the report identifies practices—not necessarily endorsed by the PCAOB—that the committee chairs found to be most effective for improving audit quality across these categories. The report also includes a few PCAOB staff responses to FAQs raised during the conversations.
Yesterday, SEC Chair Jay Clayton, SEC Chief Accountant Sagar Teotia and Corp Fin Director William Hinman posted a “Statement on Role of Audit Committees in Financial Reporting and Key Reminders Regarding Oversight Responsibilities.” As the year draws to a close, given the vital role of audit committees in the financial reporting system, the Statement is intended to provide “observations and reminders on a number of potential areas of focus for audit committees. Issuers and independent auditors also should be mindful of these considerations with an eye toward ensuring that audit committees have the resources and support they need to fulfill their obligations.”
Happy New Year Everyone!
Recently, SEC Chief Accountant Sagar Teotia hinted at possible forthcoming changes to the auditor independence rules, remarking that, in connection with the recent changes related to lending relationships, the SEC “also received comments on other aspects of auditor independence rules. In conjunction with that feedback, the Chairman directed the staff to formulate recommendations to the Commission for possible additional changes to the auditor independence rules for potential rulemaking.” However, the nature of the potential changes remained something of a mystery. The proposal to amend the auditor independence rules has now been released. According to the press release issued today, the proposal is intended to modernize aspects of the independence rules to minimize the potential for “relationships and services that would not pose threats to an auditor’s objectivity and impartiality [to] trigger non-substantive rule breaches or potentially time consuming audit committee review of non-substantive matters.” It is important to keep in mind that violations of the auditor independence rules can have serious consequences not only for the audit firm, but also for the audit client. For example, an independence violation may cause the auditor to withdraw its audit report, requiring the audit client to have a re-audit by another audit firm. As a result, in most cases, inquiry into the topic of auditor independence should be a menu item on the audit committee’s plate. The comment period will be open for 60 days.