SEC: Potential impact of coronavirus on audit quality

The SEC and the PCAOB have been trying for years to gain greater access to China-based companies and auditors whose work is relied on by U.S. investors. In November 2019, the SEC met with senior representatives of the four largest global network auditing firms to discuss audit quality across their global networks and challenges faced in auditing public companies with operations in emerging markets, including China, the largest emerging market economy.

The November 2019 discussions were part of the SEC’s ongoing efforts to address the issues highlighted in its December 2018 statement on the vital role of audit quality and regulatory access to audit and other information internationally. “We expect to have similar meetings with other U.S. audit firms that, through use of their own networks or otherwise, audit U.S.-listed companies with significant operations in emerging markets, including China,” the SEC and PCAOB said.

“We urge issuers to work with their audit committees and auditors to ensure that their financial reporting, auditing, and review processes are as robust as practicable in light of the circumstances in meeting the applicable requirements.”

Jay Clayton, Chairman, SEC

Collectively, the four largest audit firms through their global networks audit the financial statements of approximately 140 China and China-based, U.S. exchange-listed, public companies, based upon audit reports issued in the 12 months ending Dec. 31, 2019.

PCAOB-China challenges

Among the issues discussed during the November 2019 meetings is that the PCAOB continues to be prevented from inspecting the audit work and practices of PCAOB-registered audit firms in China on a comparable basis to other non-U.S. jurisdictions. “PCAOB inspections are a key component of our regulatory efforts to enhance the quality of financial reporting and ensure audit quality,” the agencies said.

Because the PCAOB is restricted in its inspection efforts in China, the SEC said it made it clear in the November 2018 meetings that it expects U.S. audit firms “to bring appropriate increased attention and resources to their internal and cross-network quality control processes.”

Over the last two weeks, SEC and PCAOB staff have reconvened with senior leaders of the four largest U.S. audit firms to discuss their efforts addressing various issues, “including the potential exposure of companies to the effects of the coronavirus and the impact that exposure could have on financial disclosures and audit quality, including, for example, audit firm access to information and company personnel,” the agencies said.

U.S.-listed companies may have significant operations in China and other jurisdictions that may be affected by the coronavirus. In addition, companies that do not themselves have operations in China or other potentially affected jurisdictions may depend on companies that do have operations in those jurisdictions, including, for example, as suppliers, distributors, and/or customers, the agencies noted.

Given that developments surrounding the coronavirus outbreak remain a “dynamic situation,” the actual effects on a company may be difficult to assess or predict, because they may depend on factors beyond the control and knowledge of issuers, SEC Chair Jay Clayton stated. “However, how issuers plan and respond to the events as they unfold can be material to an investment decision, and we urge issuers to work with their audit committees and auditors to ensure that their financial reporting, auditing, and review processes are as robust as practicable in light of the circumstances in meeting the applicable requirements,” he said.

“Issuers and their advisers are encouraged to contact SEC staff regarding any need for relief or guidance,” the SEC said. “Based on these communications and its continuing monitoring of the situation, the staff will determine whether to provide additional guidance and relief as appropriate for affected parties. Relief may be made available on a case-by-case or broader basis as circumstances merit.”