SEC Approves PCAOB Rule Governing Determinations Under the Holding Foreign Companies Accountable Act

On November 4, 2021, the U.S. Securities and Trade Fee (SEC) approved the Public Firm Accounting Oversight Board’s (PCAOB) Rule 6100, Board Determinations Under the Holding Foreign Companies Accountable Act (Rule 6100).  

As outlined in our earlier alert, the Holding Foreign Companies Accountable Act (HFCA Act), which turned efficient December 18, 2020, requires the SEC to ban buying and selling of securities of any “covered issuer” on any nationwide securities alternate or different methodology regulated by the SEC, together with “over the counter” buying and selling, if the PCAOB has been unable to “inspect or investigate completely” the lined issuer’s auditor in a overseas jurisdiction for 3 consecutive years attributable to a place taken by governmental authorities in the jurisdiction.

Rule 6100 establishes a framework for the PCAOB’s willpower whether or not it is ready to examine or examine utterly registered public accounting corporations situated in a overseas jurisdiction due to a place taken by a number of governmental authorities in that jurisdiction. The SEC’s approval of Rule 6100 is one other necessary step in implementing the HFCA Act and follows the SEC’s adoption of interim ultimate guidelines earlier this 12 months implementing the submission and disclosure necessities of the HFCA Act (see our earlier alert right here).

Rule 6100 establishes the following aspects of the PCAOB willpower course of: (1) the method of the PCAOB’s determinations; (2) the components the PCAOB is required to judge and the paperwork and knowledge it’s required to think about when assessing whether or not a willpower is warranted; (3) the type, public availability, efficient date, and period of such determinations; and (4) the course of by which the PCAOB will reaffirm, modify, or vacate any such determinations.

Two forms of determinations are addressed in Rule 6100: (1) determinations as to a specific overseas jurisdiction, which might apply to all registered public accounting corporations headquartered in that jurisdiction, and (2) determinations as to a specific registered agency with an workplace in a overseas jurisdiction. PCAOB anticipates that the majority determinations below Rule 6100 might be jurisdiction-wide determinations.

Rule 6100 units forth three components to be evaluated by PCAOB in figuring out whether or not it is ready to “inspect or investigate completely” registered public accounting corporations in overseas jurisdictions for functions of the HFCA Act:

  • whether or not it might probably choose engagements, audit areas, and potential violations to be reviewed or investigated;

  • whether or not it has well timed entry to agency personnel, paperwork and knowledge related to its inspection or investigation and the capacity to retain and use such paperwork and knowledge; and

  • whether or not it might probably conduct inspections and investigations in a way according to the provisions of the Sarbanes-Oxley Act of 2002 and PCAOB guidelines.

As soon as the PCAOB makes a willpower, it’s required to submit a report back to the SEC. The report is required to:

  • describe the PCAOB’s evaluation of whether or not the place taken by the overseas governmental authority (or authorities) impairs the PCAOB’s capacity to satisfy its duties with respect to inspections or investigations of registered public accounting corporations with headquarters or places of work in the jurisdiction;

  • describe the foundation for the PCAOB’s willpower; and

  • determine in an annex to the report the registered public accounting agency(s) to which the willpower applies.

The PCAOB’s willpower will change into efficient on the date the report is issued to the SEC below Rule 6100. The PCAOB is required to promptly publish the report on its web site and ship a duplicate to every affected registered public accounting agency by electronic message.

Under Rule 6100, a PCAOB willpower will stay efficient till it’s reaffirmed, modified or vacated by the PCAOB. The rule requires the PCAOB to yearly reassess every willpower that’s in impact. As well as, the PCAOB might reassess a willpower at any time by itself initiative or at the SEC’s request. When the PCAOB reaffirms, modifies, or vacates a willpower, it can problem a report back to the SEC, make the report publicly out there on the PCAOB’s web site, and ship a duplicate to every affected registered public accounting agency.

In its webpage, the PCAOB has recognized 20 PCAOB-registered audit corporations situated in jurisdictions which have denied PCAOB’s entry to conduct inspections. All of those corporations are based mostly in both China or Hong Kong. Whereas the info contained in the webpage doesn’t represent a PCAOB willpower below the HFCA Act or Rule 6100, it’s obvious that Rule 6100 might impression Chinese language firms buying and selling on U.S. securities exchanges that use registered public accounting corporations with headquarters or places of work in China or Hong Kong.

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