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.