On March 24, the Securities and Exchange Commission adopted interim final amendments to implement congressionally mandated submission and disclosure requirements of the Holding Foreign Companies Accountable Act (HFCA Act).
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Holding Foreign Companies Accountable Act Signed Into Law by President Trump
In December 2020, President Donald Trump signed into law the Holding Foreign Companies Accountable Act (the HFCAA). The HFCAA requires auditors of foreign companies that are publicly traded in the US to allow the Public Company Accounting Oversight Board (PCAOB) to inspect the auditors’ audit work papers for audits of non-US operations. If a company’s auditors fail to comply with the inspection requirement for three consecutive years, trading in such foreign company’s securities would be prohibited in US markets. The HFCAA also amends the Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act), mandates that the Securities and Exchange Commission identify foreign issuers that use an audit firm that is located in a foreign jurisdiction in which the PCAOB is restricted from inspecting or investigating the audit firm, and imposes additional SEC disclosure requirements on such foreign issuers.
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Division of Corporation Finance Issues Disclosure Consideration for China-Based Issuers
On November 23, the Division of Corporation Finance (the Division) of the Securities and Exchange Commission issued CF Disclosure Guidance: Topic No. 10 (the Guidance), providing the Division’s views regarding disclosure considerations for companies based in or with the majority of their operations in the People’s Republic of China (referred to as “China-based” companies).
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SEC Division of Corporation Finance Releases Financial Reporting Manual Updates
On November 18, the Division of Corporation Finance (Division) of the Securities and Exchange Commission released updates to the Division’s Financial Reporting Manual. The Financial Reporting Manual is a key source of the Division’s informal accounting guidance and has been updated with changes through October 30.
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CFTC Releases No-Action Position on PCAOB Requirement to Communicate Critical Audit Matters
On August 29, the Commodity Futures Trading Commission’s Division of Swap Dealer and Intermediary Oversight (Division) issued a no-action letter confirming that it will not recommend enforcement action against a futures commission merchant (FCM) if the accountant’s audit opinion included in the FCM’s annual financial report does not include “critical audit matters” (or the absence thereof) as required by the Public Company Accounting Oversight Board (PCAOB) standards. CFTC regulations generally require accountants engaged in audits of FCMs to register with the PCAOB and to conduct FCM audits in accordance with PCAOB standards. In 2017, the PCAOB adopted AS 3101, which requires an auditor registered with the PCAOB to communicate any critical audit matters in its audit report related to the financial statements of public companies. “Critical audit matters” include matters that are communicated or required to be communicated to the audit committee and: (1) relate to the accounts or disclosures that are material to the financial statements; and (2) involve especially challenging, subjective or complex auditor judgment.
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SEC Approves PCAOB Rule to Require Enhanced Audit Reports
On October 23, the Securities and Exchange Commission approved new audit reporting standard, AS 3101, proposed by the Public Company Accounting Oversight Board (PCAOB), which requires auditors to provide new information in public company audit reports, with the goal of making such reports more informative for investors and other financial statement users. The adoption of the PCAOB rule represents the first significant change to the auditor’s report in several decades and will fundamentally change the auditors’ report from a writing that consists entirely of boilerplate (in the vast majority of cases at least), into a document that contains disclosure specific to the particular filer, as discussed in more detail below. In a public statement on October 23, SEC Commissioner Kara Stein said she expects the PCAOB rule to result in auditor’s reports that “provide investors with more meaningful information about the audit, including significant estimates and judgments, significant unusual transactions and other areas of risk at a company,” which will “add to the total mix of information available to investors when making voting and capital allocation decisions.”
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PCAOB Re-Proposes Auditor Reporting Standard to Enhance Auditor Reports
On May 11, the Public Company Accounting Oversight Board (PCAOB) re-proposed its standard for information that auditors are required to provide in their audit opinions. As noted in its press release regarding the re-proposed standard, the PCAOB desires to make auditor’s reports more informative for investors. In 2013, the PCAOB proposed a standard that would require a firm to disclose in its audit reports critical audit matters arising from an audit of an issuer’s financial statements. The PCAOB received extensive comments in response to its original proposal and held a public roundtable to discuss the previously proposed standard and comments received. As a result, the PCAOB has re-proposed the standard with modifications to its original proposal.
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SEC Approves PCAOB Rules Requiring Disclosure of Audit Participants
On May 9, the Securities and Exchange Commission adopted the proposed new rules and related amendments to auditing standards (Rules). As reported in the January 8 edition of Corporate and Financial Weekly Digest, the Public Company Accounting Oversight Board (PCAOB) adopted and proposed the Rules for SEC approval to provide investors with more information about who participates in public company audits.
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PCAOB Adopts New Rules Requiring Disclosure of Participants in an Audit
On December 15, 2015, the Public Company Accounting Oversight Board (PCAOB) adopted new rules and related amendments to auditing standards (Rules) to provide investors with more information about who participates in public company audits, facilitating greater transparency to investors.
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