Securities Regulation Daily SEC urges communication with auditors and audit committees on impacts of coronavirus
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Thursday, February 20, 2020

SEC urges communication with auditors and audit committees on impacts of coronavirus

By Amanda Maine, J.D.

Officials advised that temporary relief from filing deadlines may be available to companies affected by the coronavirus. Affected issuers have been encouraged to contact the SEC for relief or guidance.

The SEC has issued a statement on how the Commission intends to approach the impact of the coronavirus on financial reporting. The statement, which was made by Chairman Jay Clayton, CorpFin director Bill Hinman, Chief Accountant Sagar Teotia, and PCAOB Chairman William Duhnke, advised that U.S. companies with significant operations in China and China-based, U.S. exchange-listed companies may be impacted by the virus. The SEC urged these companies to work with their audit committees and audit firms to ensure that their financial reporting processes remain as robust as possible in light of the circumstances, and to contact the SEC for relief or guidance if necessary.

Big Four meetings. In the statement, the SEC said that the staff met with senior representatives from the four largest U.S. audit firms in November 2019 to discuss audit quality challenges in emerging markets. In particular, the statement highlighted that the PCAOB continues to be prevented from inspecting the audit work and practices of PCAOB-registered audit firms in China. According to the statement, the SEC made clear that U.S. audit firms should bring increased attention and resources to their internal and quality control processes.

Over the last two weeks, SEC officials met again with the leaders of the Big Four firms to discuss various issues, including the potential effects of the coronavirus, which has caused over two thousand deaths in China with 75,748 confirmed cases globally, according to the World Health Organization.

Impact of the coronavirus. The statement cites a January 30 statement by Chairman Clayton that assured that SEC staff will be monitoring and providing appropriate guidance to issuers and other market participants relating to the current and potential effects of the coronavirus, while cautioning that the dynamic nature of the situation may make it difficult to assess what the effects of the virus will be on both an industry-wide and issuer-specific basis.

During the most recent dialogue with representatives of the Big Four firms, according to the statement, SEC officials advised that how issuers plan and respond to events surrounding the spread of the coronavirus can be material to an investment decision. The SEC is urging issuers to work with their audit committees and auditors to ensure that their financial reporting, auditing, and review processes still meet applicable requirements in light of the circumstances.

The statement also makes clear that the coronavirus may affect not only companies with significant operations in China or other affected jurisdictions, but also companies in other jurisdictions such as suppliers, distributors, and customers.

According to the statement, in meeting with audit firm representatives, SEC officials emphasized the need to consider the disclosure of subsequent events in the notes to the financial statements in accordance with ASC 855. The statement also reiterated its general policy to grant appropriate relief from filing deadlines in situations where they cannot be completed on time due to situations beyond the control of the issuer. The SEC encouraged issuers and their advisors to contact the SEC staff if they need relief or guidance. Such relief may be granted on a case-by-case basis or on a broader basis, depending on the circumstances.

Other regulatory reactions. In addition to Chairman Clayton’s January statement, the SEC issued an investor alert on February 4 warning investors to be aware of coronavirus-related investment scams. One scam involves promoters pumping up the price of stocks of companies purporting to sell products and services to prevent, detect, or cure coronavirus and then dumping their own shares on the market when the stock price is at a high point.

Hong Kong securities regulators have also issued guidance indicating that public company reporting requirements may be relaxed in circumstances where the coronavirus has impacted earnings releases or the issuance of financial statements, especially in light of global travel restrictions. The U.K.’s Financial Reporting Council also issued guidance relating to the coronavirus, including recommending that companies consider whether to refer to the possible impact of the coronavirus on their business in their reporting of principal risks and uncertainties. Where mitigating actions can be taken, these should also be reported alongside the description of the risk itself, the FRC advised.

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