PCAOB Adopts Rule To Create Framework For HFCAA Determinations

September 2021

BY

Phillip AustinNational Managing Partner - Professional Practice and Audit

Tim KvizNational Managing Partner - SEC Services

Patricia BottomlyNational Managing Partner – Audit Methodology and Consultations

Established in support of both audit quality and quality of financial reporting, the PCAOB Board newly adopted a rule that establishes a framework for determining whether the Board is unable to inspect or investigate completely registered public accounting firms because of a position taken by one or more authorities in a certain jurisdiction. For issuers who retain such firms, the SEC shall require certain disclosures within their annual reports and, if conditions persist, may prohibit trading in such issuers’ securities.
 
  

History and Summary of Rule

In September, the PCAOB adopted a new rule, PCAOB Rule 6100, Board Determinations Under the Holding Foreign Companies Accountable Act (HFCAA), to provide a framework for its determinations that the Board is unable to inspect or investigate completely registered public accounting firms located in a foreign jurisdiction because of a position taken by one or more authorities in that jurisdiction.
 
The PCAOB has responsibilities to inspect registered public accounting firms under the Sarbanes-Oxley Act of 2002 (the Act). These inspections are the Boards “primary tool of oversight” intended to promote audit quality and enhance the quality of financial reporting. Section 102 of the Act prohibits public accounting firms that are not registered with the Board from preparing or issuing, or from participating in the preparation or issuance of, audit reports with respect to issuers, brokers, or dealers. These provisions apply equally to U.S. and non-U.S. public accounting firms.
 
The Board has worked collaboratively with authorities in foreign jurisdictions to fulfill these requirements. Authorities in a limited number of foreign jurisdictions, however, have taken positions that deny the Board the access it needs to conduct its mandated oversight activities. Recognizing the ongoing obstacles to Board inspections and investigations in certain foreign jurisdictions, Congress enacted the Holding Foreign Companies Accountable Act (HFCAA), which mandates that the SEC require covered issuers who retain firms that the board determines it is unable to inspect or investigate completely, to make certain disclosures in their annual reports.  Eventually, if certain conditions persist, the SEC shall prohibit trading in those issuers’ securities.
 
Rule 6100 establishes a framework for the Board to make its determinations under the HFCAA. The intention is to maintain a level playing field between domestic and foreign firms. Specifically, the rule establishes:
  • The manner of the Board’s determinations
  • The factors the Board will evaluate and the documents and information it will consider when assessing whether a determination is warranted
  • The form, public availability, effective date, and duration of such determinations
  • The process by which the Board will reaffirm, modify, or vacate its determinations
 
To make the determination the board will evaluate the following three factors:
  1. The Board’s ability to select engagements, audit areas, and potential violations to be reviewed or investigated
  2. The Board’s timely access, and the ability to retain and use, any document or information (including through conducting interviews and testimony) in the possession, custody, or control of the firm(s) or any associated persons thereof that the Board considers relevant to an inspection or investigation
  3. The Board’s ability to conduct inspections and investigations in a manner consistent with the provisions of the Act and the rules of the Board, as interpreted and applied by the Board
 
The new rule specifies how the Board should communicate its determinations. First, the Board’s determination will be issued in the form of a report to the SEC. The report will analyze the factors and describe the basis of the Board’s conclusions and will include an appendix listing the firm(s) subject to the determination. Next, a copy of the report will promptly be made publicly available on the PCOAB’s website. Finally, a copy of the report will be sent by electronic mail to each registered public accounting firm listed within the appendix to the  report.
 
A Board determination becomes effective on the date the Board issues its report to the SEC. The Board has elected to reassess annually each determination that is in effect and to issue, at the conclusion of each reassessment, a report reaffirming, modifying, or vacating the determination.
 
The HFCAA, among other things, also mandates that after the Board makes such a determination, the SEC shall require covered issuers that retain firms subject to the Board’s determination to make certain disclosures in their annual reports and, eventually, if certain conditions persist, shall prohibit trading in those issuers’ securities.
 

SEC Approval and Effectiveness

The new rule is subject to SEC approval, and if approved will immediately become effective and the PCAOB will promptly make any determinations under the rule that are appropriate.
   

Learn More

View the PCOAB Rule. Access to further information on the PCAOB’s international oversight activities.

We invite you to explore additional resources of interest and educational programming via the BDO Center for Corporate Governance.