The Sarbanes Oxley Act
and Non US law (conflicts, problems, answers)
Welcome to the June 2010 edition of the Sarbanes
Oxley Compliance Professionals Association (SOXCPA)
newsletter
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Dear Member,
Today we
will discuss some interesting aspects about the
implementation of the Sarbanes Oxley Act
outside the United States. PCAOB (Board) Rule 2105, PCAOB Rule
2106, Issues Relating to Non-U.S. Accounting Firms, non-U.S. law
that prohibits firms from providing information etc.
Under the Sarbanes-Oxley Act, non-U.S.
public accounting firms that audit or play
a substantial role in the audit of U.S. issuers, are
subject to oversight by the PCAOB.
Currently, over 900 non-U.S. audit
firms from more than 85 countries have registered with the
PCAOB.
Under the Act and the Board's rules,
non-U.S. registered firms are subject to
PCAOB inspections in the same manner as U.S. firms.
This often raises special considerations. The Board began
talking about these issues with its non-U.S. counterparts not
long after its establishment, and adopted a cooperative
framework that allows the PCAOB to rely, to a degree deemed
appropriate by the Board, on inspection or enforcement work
performed by a home-country regulator.
Reliance by the
Board is based on a sliding scale -- the
more independent and rigorous a home-country system of
oversight, the more the Board may rely upon it.
By developing cooperative arrangements with its counterparts,
the PCAOB endeavors to minimize administrative burdens and
potential legal or other conflicts that non-U.S. registered
firms may face.
In countries without an independent audit
regulator, or where the inspection program is nascent, the PCAOB
still seeks to coordinate with the relevant financial regulator
or government ministry before commencing inspections.
Also, because the Board recognizes that
cooperation is a two-way street and, therefore, should be
reciprocal, the PCAOB rules allow the
PCAOB to assist non-U.S. regulators in their inspections and
investigations of U.S. firms that are subject to dual oversight.
Issuer Audit Clients
of Non-U.S. Registered Firms in Jurisdictions where the PCAOB is
Denied Access to Conduct Inspections
Public companies, whether located in the
United States or abroad,
access U.S. capital markets by
complying with certain U.S. legal requirements, including the
requirement to periodically file audited financial statements with
the U.S. Securities and Exchange Commission.
Under the
Sarbanes-Oxley Act of 2002, the auditor of those financial
statements – whether a U.S. auditor or a
non-U.S. auditor – must be registered with the Public
Company Accounting Oversight Board and must undergo regular PCAOB
inspections to assess their compliance with U.S. law and
professional standards in connection with those audits.
As
of April 2010, the PCAOB has conducted more than 1,300 inspections
of registered firms in the U.S. and in 33 non-U.S. jurisdictions.
PCAOB
inspections regularly identify deficiencies in firms' audits and
in their quality control procedures.
Well
before the PCAOB issues an inspection report, inspections often
result in firms performing additional procedures that should have
been performed at the time of the audit, and those procedures have
often led to the audited company restating its financial
statements.
In
addition, through the quality control remediation portion of the
inspection process, inspected firms identify and implement
practices and procedures to improve future audit quality.
Because of the position taken by authorities
in certain European countries and in China, the PCAOB is currently
prevented from inspecting the U.S.-related audit work and
practices of PCAOB-registered firms in certain European countries,
China, and, to the extent their audit clients have operations in
China, Hong Kong. The PCAOB continues to work to eliminate
obstacles to inspection in those countries.
As long
as those obstacles persist, however,
investors in U.S. markets who rely on those firms' audit reports
are deprived of the potential benefits of PCAOB inspections
of those auditors.
Jurisdictions in Which the PCAOB has Conducted Inspections
(As of Dec. 31, 2009)
The PCAOB has conducted inspections of
one or more registered firms located in the following non-U.S.
jurisdictions:
Argentina
Australia
Belize
Bermuda
Bolivia
Brazil
Canada
Cayman Islands
Chile
Colombia
Greece
Hong Kong
India
Indonesia
Ireland
Israel
Japan
Kazakhstan
Republic of Korea
Mexico
New Zealand
Norway
Panama
Papua New Guinea
Peru
Philippines
Russian Federation
Singapore
South Africa
Taiwan
Ukraine
United Arab Emirates
United Kingdom
Jurisdictions in which there are Firms whose Inspections The PCAOB
Intends to Conduct in 2010
Australia
Canada
China
Finland
France
Germany
Greece
Hong Kong
Hungary
India
Ireland
Italy
Japan
Kazakhstan
Republic of
Korea
Luxembourg
Netherlands
New Zealand
Norway
Panama
Portugal
South Africa
Spain
Sweden
Switzerland
Taiwan
United Arab Emirates
United Kingdom
Frequently Asked Questions Regarding Issues
Relating to Non-U.S. Accounting Firms - June 1, 2010
QUESTION
"My firm is a foreign public accounting firm
intending to register with the Board, but we intend to make a
submission under PCAOB Rule 2105 explaining that a non-U.S. law
prohibits the firm from providing some of the information required
by the Board's Form 1. How will this affect consideration of the
firm's application?"
UNDERSTANDING THE QUESTION
The answer will be based
on PCAOB Rule 2105 and PCAOB Rule 2106
The PCAOB Rule 2105 - "Conflicting
Non-U.S. Laws":
(a) An
applicant may withhold information from its
application for registration when submission of such information
would cause the applicant to violate a non-U.S. law if that
information were submitted to the Board.
(b) An
applicant that claims that submitting information as part of its
application would cause it to violate non-U.S. laws must –
(1) identify, in accordance with the instructions on Form 1, the
information that it claims would cause it to violate non-U.S. laws
if submitted; and
(2)
include as an exhibit to Form 1 –
(i) a
copy of the relevant portion of the
conflicting non-U.S. law;
(ii) a
legal opinion that submitting the
information would cause the applicant to violate the conflicting
non-U.S. law; and
(iii)
an explanation of the applicant's efforts to
seek consents or waivers to eliminate the conflict, if the
withheld information could be provided to the Board with a consent
or a waiver, and a representation that the applicant was unable to
obtain such consents or waivers to eliminate the conflict.
The PCAOB Rule 2106 - "Action on
Applications for Registration"
(a) Standard for Approval.
After reviewing the application for registration, any
additional information provided by the applicant, and any other
information obtained by the Board, the Board will determine
whether approval of the application for registration is consistent
with the Board's responsibilities under the Act to protect the
interests of investors and to further the public interest in the
preparation of informative, accurate, and independent audit
reports for companies the securities of which are sold to, and
held by and for, public investors.
(b) Action on Application.
Unless the applicant
consents otherwise, the Board will take action on an application
for registration not later than 45 days after the date of receipt
of the application by the Board.
(1) If the Board makes
the determination in paragraph (a) of this Rule, the Board will
approve the application.
(2) If
the Board is unable to determine that the standard for approval in
paragraph (a) of this Rule is met, or if the Board determines that
the application may be materially inaccurate or incomplete, the
Board will:
(i)
request more information from the applicant; or
(ii)
provide the applicant with written notice of a hearing, pursuant
to the Board's procedural rules governing disciplinary
proceedings, to determine whether to approve or disapprove the
application. Such notice will specify, in reasonable detail, the
proposed grounds for disapproval. Such notice may, at the
applicant's election, be treated as a written notice of
disapproval for purposes of Section 102(c) of the Act.
(c) Requests for More Information.
If the Board requests more information from an applicant,
and such applicant submits the requested information to the Board,
the Board will treat the application, as supplemented by the
requested information, as if it were a new application for
purposes of paragraph (b) of this Rule.
The Board
will take action on such supplemented applications as soon as
practicable, and not later than 45 days after receipt of the
supplemented application by the Board.
If such
firm declines to provide the requested information, or fails to do
so within a reasonable amount of time, the Board may deem the
application incomplete for purposes of paragraph (b)(2) of this
Rule, may deem the application not to have been received in
accordance with Rule 2102, or may take such other action as the
Board deems appropriate.
ANSWER FROM
THE PCAOB
Rule 2105(a) allows an applicant to withhold
information from its application for registration "when submission
of such information would cause the applicant to violate a
non-U.S. law if that information were submitted to the Board."
Rule
2105(b) describes the submission an applicant must make if it
claims that the Rule 2105(a) standard is satisfied with respect to
information that the applicant withholds from its application.
In reviewing a Rule 2105 submission, the staff will consider
whether the submission both conforms to the requirements of Rule
2105(b) and raises issues of non-U.S. law that are sufficient
under Rule 2105(a) to warrant treating the application as complete
even though certain information is omitted.
If, in the staff's view, both criteria are
satisfied, the staff will recommend that the Board treat the
application as complete and take action on the application,
consistent with PCAOB Rule 2106(b), within 45 days of the date the
application is received (as determined pursuant to PCAOB Rule
2102).
Any such
action by the Board would not constitute a concession that the
non-U.S. law does in fact prohibit the applicant from supplying
the information, and would not preclude the Board from contesting
that assertion in other contexts.
In
addition, a decision to treat the application as complete does not
mean that the absence of the information will be irrelevant to the
Board's consideration of the application.
The Board
could determine that the absence of particular information from a
particular application, even though sufficiently justified by
reference to non-U.S. law, leaves the Board unable to make the
determination that the Board must make under PCAOB Rule 2106(a) in
order to approve the application.
If, in
the staff's view,
(1) the submission does not conform to the
requirements of Rule 2105(b) or
(2) the
cited non-U.S. law does not satisfy the Rule 2105(a) test (i.e.,
the applicant would not violate non-U.S. law by submitting the
information to the Board as part of the registration application),
the staff
may recommend that the Board treat the application as
materially incomplete and
request additional information from the
applicant under PCAOB Rule 2106(b)(2)(i).
Three foreseeable issues warrant particular
mention.
First, Rule 2105(b)(2)(ii) requires
submission of
"a legal opinion that
submitting the information would cause the applicant to violate
the conflicting non-U.S. law" (emphasis added).
Accordingly, the legal opinion must pertain to whether non-U.S.
law would be violated by the specific applicant submitting the
specific information in the specific context of registration with
the Board.
A legal
opinion that does not opine on that point does not conform to the
requirements of the rule.
If the
legal opinion included as part of a Rule 2105 submission does not
opine on that point as to each category of information that the
applicant does not provide, the staff will recommend that the
Board treat the application as materially incomplete and request
additional information under Rule 2106(b)(2)(i).
Second, professional standards are
not "laws" for purposes of Rule 2105.
Accordingly, a Rule 2105 submission that relies on professional
standards alone (i.e., without citing something in the
jurisdiction's legislated law that requires compliance with the
standard) as a basis for withholding information from an
application does not conform to the requirements of the rule.
In the
event of such a submission, the staff will recommend that the
Board treat the application as materially incomplete and request
additional information under Rule 2106(b)(2)(i).
Third, the Board staff will recommend
that the Board treat as materially incomplete, and request
additional information on, an application that
does not include the applicant's consent to
cooperate with the Board (Item 8.1) if the only basis for
not providing that consent is a non-U.S. law that prohibits a firm
from disclosing documents or information without a client's
consent.
As
described in more detail in response to question number 4 below,
the staff does not view the absence of a client's consent as
relieving a firm of its obligation to cooperate with the Board.
The three
issues discussed above are only examples and do not constitute the
only circumstances in which the Board might request additional
information under Rule 2106(b)(2)(i).
If the
Board does request additional information, then, under Rule
2106(c), a new 45-day period within which the Board must act on
the application commences when the applicant provides the
information.
Consistent
with the terms of Rule 2106(c), however, the Board and the staff
work to ensure action on such supplemented applications as soon as
practicable.
QUESTION
"If
non-U.S. law prohibits my firm from providing certain specific
identifying information required by the Board's Form 1, is the
firm nevertheless required to answer any associated yes/no
questions that do not require specific identifying information?"
ANSWER
FROM THE PCAOB
Yes.
For
example, Item 5.1(a) of Form 1 requires an applicant to
indicate, by checking "yes" or "no,"
whether the applicant or any associated person of the applicant is
a defendant or respondent in any of certain specified types of
proceedings (including, for example, an administrative or civil
action arising out of the applicant's or associated person's
conduct in connection with an audit report).
If the
correct answer to Item 5.1(a) is "yes," Item 5.1(b) requires the
applicant to supply certain identifying
information related to the matter and the individuals
involved.
An
assertion that non-U.S. law prohibits an applicant from supplying
the identifying information required by Item 5.1(b) is not by
itself sufficient to relieve the applicant of the obligation to
supply a "yes" or "no" answer in Item 5.1(a).
If an
applicant's Rule 2105 submission does not
specifically describe a legal conflict that prohibits the
applicant from supplying an answer to Item 5.1(a), then the
applicant must supply that answer even if a legal conflict
prohibits the applicant from supplying additional details in
response to Item 5.1(b).
The same
principle applies to other "yes/no" questions in the Form,
including Items 5.2(a), 6.1(a), and 6.1(b).
QUESTION
"Does a
registered firm's obligation to cooperate with the Board include
an obligation to obtain from non-U.S. clients a consent or waiver
sufficient to allow the registered firm to provide the Board with
documents and information concerning the issuer?"
ANSWER
FROM THE PCAOB
The
Sarbanes-Oxley Act requires public accounting firms to register
with the Board in order to engage in certain audit work.
The Act
imposes on registered firms an obligation to
cooperate and comply with Board requests for testimony or
documents made in furtherance of the Board's authority and
responsibilities under the Act.
The
Board's responsibilities under the Act include conducting
inspections under Section 104 of the Act and investigations under
Section 105.
To carry
out these responsibilities, the Board will
need to review documents and information in a firm's possession
concerning the firm's audit clients.
(Section
104, for example, requires that Board inspections include reviews
of individual audit engagements.)
In
addition, Section 106 of the Act provides
that any non-U.S. public accounting firm that chooses to engage in
certain work, and any registered U.S. firm that chooses to rely on
certain work by a non-U.S. firm, are each deemed to have consented
to produce the non-U.S. firm's audit workpapers to the Board or
the Commission.
A
registered firm's failure to cooperate
with Board requests in these contexts
may
subject the firm to disciplinary sanctions, including substantial
civil money penalties and revocation of the firm's registration.
In the
staff's view, if a firm fails to cooperate with the Board, the
fact that the firm has not obtained a client consent that might be
necessary (under non-U.S. law) to allow the firm to cooperate is
not a defense to a disciplinary action for failure to cooperate.
As a
practical matter, therefore,
a firm must
choose whether
(1) to
satisfy itself in advance that the non-U.S. client will provide
any necessary consent if and when the Board demands documents or
information concerning the client,
(2) to
proceed without such assurance and take a risk that it may later
have to choose between providing information without the client's
consent or facing a Board sanction for failing to provide the
information, or
(3) to
decline the audit engagement.
The Board
has not attempted to dictate which of these choices a firm should
make.
Accordingly, a firm might conclude that it is in the firm's
interest to obtain a non-U.S. client's advance assurance that the
client will provide its consent when necessary for the firm to
comply with a Board demand.
A firm's
compliance with its obligations to the Board, however, is
judged not by the existence, form, or
content of any such assurance from a client, but by whether the
firm provides documents and information when the Board requires
them.
Whether
and how a firm assures itself that it will be in a position to
comply with Board demands is a matter for each firm to decide and,
if necessary, to work out with its non-U.S. clients.
QUESTION
"My firm
is a registered U.S. firm, but some of my firm's "associated
persons" are non-U.S. firms that assert that their local law
prohibits them from executing the consents that the Act and PCAOB
Rules require registered firms to secure from all associated
persons. What are the consequences of my firm's failure to secure
such a consent from those associated persons?"
ANSWER
FROM THE PCAOB
If the
Board discovers that a registered firm has
failed to secure the required consent from an associated
person, the Board could take disciplinary
action against the registered firm solely on the basis of that
failure.
Where the
failure to secure such a consent is based on
an asserted conflict with non-U.S. law, however, a registered firm
may be able to obtain advance assurance that the staff will not
recommend that the Board take disciplinary action solely on the
basis of that failure.
To
seek that assurance, a registered firm should submit the same
information that PCAOB Rule 2105 would require in the context of a
registration application.
After
considering the asserted conflict, the staff
will generally provide the requested assurance if the staff
determines that the issues raised by the non-U.S. law are
sufficient to warrant doing so.
If the
staff does provide the requested assurance, the staff's position
will not constitute acknowledgement that the firm's assertions
about non-U.S. law are correct and will not preclude the Board
from contesting those assertions in any context.
If the
staff does not provide the requested assurance, the registered
firm may wish to take that into account in determining whether to
use the non-U.S. firm in an "associated person" capacity.
QUESTION
"My firm
is located in a non-U.S. jurisdiction in which PCAOB inspections
are currently prevented because of the position taken by local
authorities. Should my firm provide any additional information
because of this circumstance?"
ANSWER
FROM THE PCAOB
In light
of current obstacles to inspections, the staff intends to begin
recommending that the Board obtain certain additional information
from applicants in the relevant jurisdictions, which are listed
below.
In order
to avoid the Board seeking such information through a formal
request for additional information, which could delay Board action
on the application until 45 days after all requested additional
information is submitted, applicants located
in these jurisdictions may provide the information when they
initially submit their application on Form 1.
The
information may be provided in Exhibit 4.1 (in addition to the
required description of the firm's quality control policies) in
the form of a separate file listing:
(a)
all issuers with respect to which, during the year of or the year
preceding submission of the firm’s registration application, the
firm or any of its personnel or predecessors performed any work
used by any registered public accounting firm in its audit of the
issuer’s financial statements, including the business address of
each such issuer, the identity of the registered public accounting
firm, and the date of the registered public accounting firm’s
audit report;
(b)
all issuers with respect to which the firm currently anticipates
performing any future work to be used by another registered public
accounting firm in an audit of the issuer’s financial statements,
including the business address of each such issuer and the
identity of the other registered public accounting firm; and
(c)
all registered public accounting firms with which the firm has any
arrangement or understanding that the firm will or may perform
work to be used by that registered public accounting firm in the
audit of an issuer.
The
staff intends to recommend that the Board
request such information from applicants in the jurisdictions
listed below, and will update this list as warranted by any change
in circumstances:
China
Hong Kong
Switzerland
All countries subject to the
European Union's Directive on Statutory
Auditors (see Directive 2006/43/EC of the European Parliament and
of the Council of 17 May 2006 on statutory audits of annual
accounts and consolidated accountants (OJ EU L 157),
specifically –
Austria
Belgium
Bulgaria
Cyprus
Czech Republic
Denmark
Estonia
Finland
France
Germany
Greece
Hungary
Iceland
Ireland
Italy
Latvia
Liechtenstein
Lithuania
Luxembourg
Malta
Netherlands
Norway
Poland
Portugal
Romania
Slovakia
Slovenia
Spain
Sweden
United Kingdom
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Contents
1.
Risk
Professionals
2.
Compliance
Professionals
3.
Sarbanes
Oxley
Professionals
4.
Basel
ii
Professionals
5.
Solvency
ii
Professionals
6.
Hedge
Funds
Professionals
7. Members of the
Board
of Directors
Dear
member,
Thank you for reading our
monthly newsletter.
Take advantage of the distance learning
and online certification program of the Association at
a cost that is unheard of.
You may visit:
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Check our Japanese
Sarbanes Oxley distance learning and online certification
program (CJSOXE).
www.sarbanes-oxley-association.com/CJSOXE_Distance_Learning_and_Certification.htm
Best
Regards,
George Lekatis
President of the Sarbanes Oxley
Compliance Professionals Association
General Manager, Compliance
LLC
1200 G Street NW Suite 800, Washington DC 20005, USA
Tel: (202) 449-9750
Email:
lekatis@sarbanes-oxley-association.com
Web:
www.sarbanes-oxley-association.com
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