SEC and PCAOB offer potential relief for audit firms in China amid coronavirus

Leaders of the Securities and Exchange Commission and the Public Company Accounting Oversight Board issued a joint statement Wednesday about the impact of the coronavirus on audit firms trying to operate in China and the impact on audit quality, while offering them the possibility of relief as auditors struggle to visit clients during the outbreak.

The joint statement — from SEC chairman Jay Clayton, PCAOB chairman William Duhnke III, SEC chief accountant Sagar Teotia and SEC Division of Corporation Finance director Bill Hinman — starts by mentioning the longtime problem of auditing public companies with operations in China. Last November, the officials met with senior representatives of the Big Four audit firms and some of their network representatives to discuss audit quality across their global networks, along with the challenges of auditing public companies with operations in emerging markets like China. They made it clear that with the PCAOB restricted in its inspection efforts in China, they expected U.S. audit firms to focus more attention and resources on their internal and cross-network quality control processes.

The PCAOB has long complained about the difficulties it has faced in trying to inspect audit firms in China, and the coronavirus outbreak is only exacerbating those problems. Auditors are having trouble visiting clients, with travel restrictions imposed by not only Chinese officials, but by other countries who are trying to avoid the spread of the disease to their own citizens.

In a statement in late January, Clayton said the SEC staff would monitor and try to provide guidance and other help to issuers and other market participants about their disclosures related to the current and potential effects of the coronavirus. However, the statement acknowledged that the actual effects could be difficult to assess or predict with meaningful precision, both in general and on an industry- and issuer-specific basis.

The four SEC and PCAOB officials met in recent weeks with the Big Four firm leaders to talk about the problems. “Over the last two weeks, the four of us met again with the leaders of the four largest U.S. audit firms, to discuss their efforts in this regard since November 2019,” they said in their joint statement. “These meetings addressed various issues, including acceptance and retention policies, independent internal and cross-network review processes, training, benchmarking and the anticipated and potential effects of the 2019 novel coronavirus.”

The meetings are part of a continuing dialogue with U.S. audit firms and network representatives about the importance of effective and consistent oversight of their member firms globally, including those operating in China and other emerging markets.

During this month’s meetings, the SEC and PCAOB officials discussed with Big Four leaders 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 audit firm access to information and company personnel.

“This remains a dynamic situation where the effects on any particular company may be difficult to assess or predict, because actual effects may depend on factors beyond the control and knowledge of issuers,” they said in the statement. “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.”

The SEC and PCAOB emphasized the need to consider potential disclosure of subsequent events in the notes to the financial statements in accordance with guidance included in Accounting Standards Codification 855, Subsequent Events, and the general policy to grant appropriate relief from filing deadlines in situations where, in light of circumstances beyond the control of the issuer, filings cannot be completed on time with the appropriate review and attention. If issuers have questions about reporting matters related to the potential effects of the coronavirus, including potential subsequent event disclosures and requests for relief, the SEC wants to hear them.

“Issuers and their advisors are encouraged to contact SEC staff regarding any need for relief or guidance,” read the statement. “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.”

On Tuesday, the United Kingdom's financial and audit regulator, the Financial Reporting Council, also issued guidance about the potential impact of the coronavirus on the ability to do audits (see our article).

Joshua Roberts/Bloomberg