Tag: PCAOB inspection
PCAOB gains “unprecedented access” to inspect audit firms in China
You might recall that, for well over a decade, the PCAOB has been unable to fulfill its SOX mandate to inspect audit firms in “Non-Cooperating Jurisdictions,” including China. Years of negotiation failed to resolve the deadlock over audit inspections and, in 2020, the Holding Foreign Companies Accountable Act amended SOX to prohibit trading on U.S. exchanges of public reporting companies audited by audit firms located in foreign jurisdictions that the PCAOB has been unable to inspect for three sequential years. (See this PubCo post.) According to the U.S.-China Economic and Security Review Commission, as of March 31, 2022, Chinese companies listed on the three largest U.S. exchanges had a total market capitalization of $1.4 trillion. (See this PubCo post.) As a result, the trading prohibitions of the HFCAA were poised to have a substantial impact. After passage of the HFCAA, more negotiations ensued, and, in August, the PCAOB took an initial step by signing a Statement of Protocol with the China Securities Regulatory Commission and the Ministry of Finance of the People’s Republic of China governing inspections and investigations of audit firms based in China and Hong Kong. (See this PubCo post.) But that was viewed as just an opening; as SEC Chair Gary Gensler phrased it, the “proof will be in the pudding. While important, this framework is merely a step in the process. This agreement will be meaningful only if the PCAOB actually can inspect and investigate completely audit firms in China. If it cannot, roughly 200 China-based issuers will face prohibitions on trading of their securities in the U.S. if they continue to use those audit firms.” To the surprise of many, last week, the PCAOB announced that it had secured unprecedented access to conduct these inspections. According to PCAOB Chair Erica Williams, for “the first time in history, the PCAOB has secured complete access to inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong. And this morning the Board voted to vacate the previous determinations to the contrary. This historic and unprecedented access was only possible because of the leverage Congress created by passing the Holding Foreign Companies Accountable Act. Congress sent a clear message with that legislation that access to U.S. capital markets is a privilege and not a right, and China received that message loud and clear. Investors are more protected today because of Congress’ leadership….” However, she added, she wanted “to be clear: this is the beginning of our work to inspect and investigate firms in China, not the end. The PCAOB is continuing to demand complete access in mainland China and Hong Kong moving forward. Our teams are already making plans to resume regular inspections in early 2023 and beyond, as well as continuing to pursue investigations.” What is the impact? To remove, at least for now, the immediate peril of delisting from U.S. exchanges that was threatening many U.S.-listed China-based companies.
Happy Holidays!
SEC preparing proposals to implement recommendations regarding emerging market listings
For over a decade, the PCAOB has been unable to fulfill its SOX mandate to inspect audit firms in “Non-Cooperating Jurisdictions,” or “NCJs,” including China. To address this issue, in May, the Senate passed the Holding Foreign Companies Accountable Act, which would amend SOX to impose certain requirements on public companies that are audited by a registered public accounting firm that the PCAOB is unable to inspect, and a version was subsequently passed by the House as an amendment to a defense funding bill. Around the same time, Nasdaq also proposed rule changes aimed at addressing similar issues in restricted markets, including new initial and continued listing standards. (See this PubCo post.) Now, the President’s Working Group on Financial Markets, which includes Treasury Secretary Steven T. Mnuchin, Fed Chair Jerome H. Powell, SEC Chair Jay Clayton and CFTC Chair Heath P. Tarbert, has issued a Report on Protecting United States Investors from Significant Risks from Chinese Companies. The Report makes five recommendations “designed to address risks to investors in U.S. financial markets posed by the Chinese government’s failure to allow audit firms that are registered with the Public Company Accounting Oversight Board (PCAOB) to comply with U.S. securities laws and investor protection requirements.” In this Statement, the SEC Chair Jay Clayton, Chief Accountant Sagar Teotia and the Directors of various SEC Divisions responded to the Report, indicating that Clayton had already “directed the SEC staff to prepare proposals in response to the report’s recommendations for consideration by the Commission and to provide assistance and guidance to investors and other market participants as may be necessary or appropriate. The SEC staff also stands ready to assist Congress with technical assistance in connection with any potential legislation regarding these matters.”
PCAOB to engage in “proactive communications” with audit committees; sample questions for audit committees
In this PCAOB staff inspection brief, issued at the end of last week, the PCAOB discusses its new strategic plan, which includes conducting “an ongoing dialogue” with audit committee chairs when their companies’ audits are subject to PCAOB inspection. The purpose is to provide the committees with “further insight” into the PCAOB process, including the inspections, and to obtain the views of committee chairs. The brief also outlines what audit committees should expect from the PCAOB’s 2019 inspections and provides a number of sample questions that audit committees may want to consider asking their auditors with regard to current inspection issues. The PCAOB expects to publish additional updates for audit committees regarding observations and findings.
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