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PCAOB Approves Framework for Holding Foreign Companies Accountable Act

Chris Gaetano
Published Date:
Sep 23, 2021
The Public Company Accounting Oversight Board (PCAOB) approved a framework for making determinations of when the regulator cannot 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. Such determinations would be used for the purposes of implementing the Holding Foreign Companies Accountable Act, which requires, among other things, that foreign corporations obtain audits from PCAOB-registered firms 

“The rule we adopt today exemplifies our strong and long-held belief that investors benefit from robust international regulatory cooperation and a level playing field for audit oversight in U.S. capital markets,” said PCAOB Acting Chairperson Duane M. DesParte. “This rule will promote transparency and consistency in the processes that support fulfillment of the Board’s responsibilities under the HFCAA.”

The act applies to public companies that have retained an accounting firm in a branch or office that, first, is located in a foreign jurisdiction and, second, cannot be inspected by the PCAOB. Generally, if the issuer goes more than three years in a row without its accounting firm being inspected by the PCAOB, then that firm will be unable to sell securities on any U.S. exchange. This prohibition would continue until the issuer retains an accounting firm that the board has inspected. If it then switches back to another firm outside the board's reach, the prohibition would be back on.

The PCAOB framework concerns how it will determine whether or not it conduct inspections, whether on a registered firm headquartered in a foreign jurisdiction or a particular firm with an office in a foreign jurisdiction. These determination will be made on an annual basis to see whether changes in facts and circumstances support any additional determinations. 

Factors playing into these determinations include the Board’s ability to select engagements, audit areas, and potential violations to be reviewed or investigated;  the Board’s timely access to, and the ability to retain and use, any document or information (including through conducting interviews and testimony) in the possession, custody, or control of the firm(s) or any associated persons thereof that the Board considers relevant to an inspection or investigation; and the Board’s ability to conduct inspections and investigations in a manner consistent with the provisions of the Act and the Rules of the Board, as interpreted and applied by the Board.

The determinations can be made on the basis of: 

(1) laws, statutes, regulations, rules, ordinances, and other legal authorities purporting to have or treated as having the force of law in the foreign jurisdiction or any political subdivision thereof, and interpretations and applications thereof;

(2) the existence or absence of any agreement (and, if applicable, the terms thereof) between the Board and any relevant authority in the foreign jurisdiction regarding the conduct of inspections and investigations, as well as the authority’s (or authorities’) interpretations of and performance under any such agreement; and

(3) the Board’s experience with respect to the foreign authority’s (or authorities’) other conduct and positions taken relative to Board inspections or investigations.

The board's decisions on such matters will not depend on having tried, but failed, to complete an inspection. When it makes a determination, it will pass its report on to the Securities and Exchange Commission (SEC), which supervises the PCAOB, as well as post it on the board's website. The PCAOB would also inform the audit firms involved, who shall have five days to notify it of any changes to its information as listed in the report, though this issuance does not count as a reassessment of determination. 

The determination is effective once the report has been passed to the SEC, and remains effective until it is reaffirmed, modified, or vacated by the board. 

The PCAOB, on its own initiative or at the SEC's request, may at any time reassess a determination that is in effect, and will do so at least annually.. Based on such reassessment, the Board will reaffirm, modify, or vacate the determination. When it does so, it will issue a report to the SEC, publish it online, and inform the firms involved. 

While the bill applies to any foreign jurisdiction, it was crafted with a particular eye towards China.  The PCAOB has long struggled with lack of access to the auditors of Chinese firms listed on U.S. exchanges. Despite years of negotiations, talks to allow inspectors into Chinese firms eventually fell apart. A major sticking point in the talks was that what the PCAOB wanted ran afoul of laws that severely restrict what information can be given to foreign actors. The PCAOB, meanwhile, has expressed concern on numerous occasion about the accuracy of the numbers coming from Chinese audit firms on companies seeking to be listed on U.S. exchanges.

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