SEC increases scrutiny of issuers whose auditors aren’t PCAOB-inspected

By Ken Tysiac

The SEC adopted rules Thursday that create new disclosure requirements for companies that issue public securities in the United States but are audited by firms that are not subject to inspection by the PCAOB.

For fiscal years beginning after Dec. 18, 2020, the SEC will identify registrants that filed annual reports with audit reports issued by registered public accounting firms that the PCAOB was unable to inspect or investigate completely because of a position taken by an authority in its jurisdiction.

Any "Commission-Identified Issuer" will be required to submit documentation to the SEC certifying (if true) that it is not owned or controlled by a governmental entity in the public accounting firm's foreign jurisdiction.

A Commission-Identified Issuer that is a "foreign issuer" as defined in Exchange Act Rule 3b-4 will be required to provide certain additional disclosures in its annual report for itself and any of its consolidated foreign operating entities.

Required disclosures include:

  • The percentage of the shares of the issuer owned by governmental entities in the foreign jurisdiction in which the issuer is incorporated or otherwise organized;
  • Whether governmental entities in the applicable foreign jurisdiction with respect to the registered public accounting firm have a controlling financial interest with respect to the issuer;
  • The name of each official of the Chinese Communist Party who is a member of the board of directors of the issuer or the operating entity of the issuer; and
  • Whether the articles of incorporation of the issuer (or equivalent organizing document) contain any charter of the Chinese Communist Party, including the text of any such charter.

The SEC has established procedures to identify issuers and impose trading prohibitions on the securities of certain Commission-Identified Issuers.

A Commission-Identified Issuer will be required to comply with the submission and disclosure requirements in the annual report for each year in which it was identified. If a registrant is identified as a Commission-Identified Issuer based on its annual report for the fiscal year ended Dec. 31, 2021, the registrant will be required to comply with the submission or disclosure requirements in its annual report filing covering the fiscal year ended Dec. 31, 2022.

The rules implement requirements set forth in the Holding Foreign Companies Accountable Act, P.L. 116-222.

"The final rule furthers the mandate that Congress laid out and gets to the heart of the SEC's mission to protect investors," SEC Chair Gary Gensler said in a news release. "The commission and the PCAOB will continue to work together to ensure that the auditors of foreign companies accessing U.S. capital markets play by our rules. We hope foreign governments will, working with the PCAOB, take action to make that possible."

Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is the JofA's editorial director.

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