The Public Company Accounting Oversight Board proposed a
The Holding Foreign Companies Accountable Act, which Congress passed last December, requires public companies to establish that they’re not owned or controlled by a foreign government such as China. Under the HFCAA, the issuer has to make such a certification if the PCAOB is unable to inspect its audit reports because the company has retained a foreign accounting firm that’s not subject to inspection by the PCAOB. If the PCAOB can’t inspect the company’s accounting firm for three consecutive years, its securities are banned from trading on a U.S. exchange or through other methods. Foreign issuers that use such firms to prepare an audit report are required to disclose for each non-inspection year the percentage of shares owned by government entities where the company is incorporated, whether government entities have a controlling financial interest, information related to any board members who are officials of the Chinese Communist Party, and whether the issuer’s articles of incorporation contain any charter of the Chinese Communist Party.
The rule proposed by the PCAOB provides a framework for the PCAOB to use when determining, under the HFCAA, whether it’s unable to inspect or investigate completely registered public accounting firms located in a foreign jurisdiction because of a position taken by one or more authorities in that jurisdiction. The proposed rule would also establish the manner of the PCAOB’s determinations; the factors the PCAOB will evaluate and the documents and information it will consider when assessing whether a determination is warranted; the form, public availability, effective date, and duration of such determinations; and the process by which the Board can modify or vacate its determinations.
The law was passed in the waning days of the Trump administration as a way to punish China, but it also reflects long-standing frustrations at the PCAOB at the inability to inspect many auditing firms in China, despite some pilot programs and attempts to reach an agreement with Chinese authorities. Some high-profile accounting scandals last year in China, particularly with Luckin Coffee, also helped spit passage of the law. Even though the law was clearly aimed at China, it has broader applicability to firms in other countries that haven’t registered with the PCAOB or don’t allow inspections. The PCAOB’s proposed rule itself doesn’t target China, but it does note that the PCAOB is now able to inspect even some jurisdictions that had been recalcitrant, such as Switzerland, but it’s still unable to inspect firms in China and Hong Kong.
“Cooperation between the PCAOB and our international counterparts is vital to facilitating meaningful audit oversight and to strengthening investor protection," said PCAOB Chairman William D. Duhnke III in a statement Thursday. "This rule will enable the PCAOB to fulfill its responsibilities under the Holding Foreign Companies Accountable Act, a law passed with extraordinary bipartisan support. The rule addresses situations where overseas authorities have denied the PCAOB the access it needs to conduct its mandated oversight activities.”
Duhnke noted during his statement at Thursday’s board meeting that the HFCAA doesn’t mandate that the PCAOB issue a rule to govern the determinations it is required to make, but he said he strongly supports issuing a rule. “A rule will promote transparency into the board’s processes and will ensure consistency over time in how the board exercises its judgment in applying the statute,” he said.
The PCAOB is asking for
“The release contains a number of questions that address matters where we would, in particular, like to hear the perspectives of our stakeholders,” said PCAOB board member Megan Zietsman. “Of course, commenters need not answer every question and are welcome to comment on other matters as well.”
With most countries, the PCAOB has managed to set up a process for doing audit firm inspections, including remotely during the pandemic. “The PCAOB has successfully worked with foreign regulatory authorities in most jurisdictions to enable the PCAOB to complete inspections and investigations, and we look forward to continuing those cooperative relationships,” said PCAOB board Rebekah Goshorn Jurata. “The HFCAA and this rulemaking aim to address instances where foreign authorities have interfered with or limited the PCAOB’s ability to inspect and investigate firms. The PCAOB’s inability to inspect certain firms has been to the detriment of investors, and I support Congress’s work to address these problems.”
She pointed to several aspects of the proposed rule where feedback would be especially helpful: the frequency of the PCAOB’s determinations and whether you believe the combination of periodic and ad hoc determinations provides sufficient flexibility and predictability to offer a fair process to stakeholders and to allow the PCAOB to fulfill its mission; the process of notifying firms that the PCAOB has determined it is not able to inspect or investigate them completely and whether you believe the process as currently described is sufficient; the duration of board determinations; whether the rule should provide the PCAOB with exceptive and/or exemptive powers; and whether there should be a process for requesting that the PCAOB reconsider its determinations and, if so, what that process should be and when it should take place.
