House Joins the Senate in passing the "Holding Foreign Companies Accountable Act"
December 10th | 2020
Generally speaking, any accounting firm, whether in the United States or abroad, that prepares or issues an audit opinion with respect to any issuer of securities in the United States is required to produce the underlying audit work papers related to that audit work at the request of the Public Company Accounting Oversight Board (“PCAOB”) or the SEC. Certain jurisdictions, however, do not currently provide the PCAOB with the ability to inspect public accounting firms or otherwise do not cooperate with U.S. regulators (“Non-Cooperating Jurisdictions,” or “NCJs”). This is widely cited as the reason for high profile frauds like Luckin Coffee.
This fact was prominently featured earlier this year when the President’s Working Group on Financial Markets, released its Report on Protecting United States Investors from Significant Risks from Chinese Companies (“PWG Report”).
The Senate, and now the House of Representatives, recently passed the Holding Foreign Companies Accountable Act, which would require a "foreign issuer" (as defined in SEA Rule 3b-4), subject to periodic reporting under the Securities Exchange Act, to disclose if its registered public accounting firm is located in a foreign jurisdiction that prevents the (the "PCAOB") from conducting audit inspections.
Among other things, the bill requires the SEC to (1) determine those SEC-registered issuers that engage an accounting firm located in a foreign jurisdiction that the PCAOB is not able to inspect; and (2) obtain from each such registered issuer "documentation that establishes the covered issuer is not owned or controlled by a governmental entity in the foreign jurisdiction" of the relevant accounting firm.
Although China was the clear target of the President’s directive, as it has some China-specific aspects (e.g., the bill requires disclosure the names of Chinese Communist Party "officials" who are members of the board of directors), the new legislation appears to be designed to achieve the desired effect from all NCJs.