June 25, 2019
On June 5, 2019, a bill was introduced to Congress that, if passed, would strengthen disclosure requirements for foreign companies listed on U.S. exchanges. The “Ensuring Quality Information and Transparency for Abroad-Based Listings on our Exchanges” (“EQUITABLE Act”) would require foreign companies with securities listed on a U.S. exchange to utilize outside accounting firms who make their audits available for inspection to the Public Company Accounting Oversight Board (“PCAOB”) in the same manner that U.S. regulators can review firms from almost all other jurisdictions. If the proposed bill becomes law, after its effective date, companies that use a foreign public accounting firm which the PCAOB is unable to inspect or investigate would be prohibited from having an initial listing on any U.S. exchange, or, if they are currently listed on a U.S. exchange, would be delisted after a grace period of three years. PCAOB published a list identifying each issuer whose PCAOB-registered auditor is located in a jurisdiction where PCAOB is denied access to conduct inspections. According to the list, approximately 200 public companies could be immediately impacted if the proposed bill becomes law, most of which are Chinese companies.
It appears that the exchanges are already reacting to the proposed bill and the issues that it seeks to address. On June 10, 2019, Nasdaq released FAQ (identification number 1696) clarifying listing standards with regard to an applicant’s financial statements in connection with an initial or continued listing. If a company’s auditor and its financial statements has not been subject to PCAOB inspection, Nasdaq may deny initial or continued listing or apply additional and more stringent criteria, such as requiring higher equity, assets, or earnings than otherwise required under the listing standards. When making such decisions, Nasdaq will consider, among other things, the results of the PCAOB inspection, adequacy of personnel participating in the company’s audit, scope of training program, and a non-U.S. firm’s global network. In addition, Nasdaq would typically deny listing or delist a company, if the company’s auditor has insufficient resources or has not undergone a PCAOB inspection. Nasdaq may also communicate directly with audit firms and request certifications to obtain comfort with regard to a company’s financial status.
It is important to note that (i) the above-mentioned congressional bill has not been passed by the House or the Senate and when or if that might happen is unknown, and (ii) not all public accounting firms will be impacted by the proposed legislation. A link is provided below to help you determine whether your company’s auditor would be non-compliant under the proposed bill or if employment of such auditor may subject your company to heightened scrutiny and listing standards by Nasdaq:
(Please note that this list is updated annually and was last updated on September 10, 2018.)
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