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MAYER HOFFMAN MCCANN P.C. – AN INDEPENDENT CPA FIRM

A publication of the Professional Standards Group

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Challenge: What are the most effective ways to adapt financial reporting to global complexities, including use of non-US auditors and fund-raising needs of emerging companies?

Commissioner Aguilar explained that obstacles to effective oversight and enforcement have arisen as the PCAOB has been prevented from inspecting the audit work of accounting firms in certain parts of the world, including certain European countries and China. In recent years, China-based companies have attracted the attention of regulators for a number of reasons, including the use of unusual tactics to gain access to the US capital markets, such as “reverse mergers” or “back-door initial public offerings.”

What to expect: Several regulators commented on initiatives underway in these areas.

a. Howard Scheck, Chief Accountant for the SEC’s Division of Enforcement, noted that the SEC had filed several administrative proceedings and one enforcement proceeding against China-based accounting firms for refusal to produce audit work papers. The administrative actions follow inquiries regarding reports of accounting errors by China-based issuers and the enforcement proceeding is part of an investigation for potential accounting

January 2013

From the AICPA’s Annual SEC/PCAOB Current Events Conference: Global Accounting Matters

fraud against US investors. The firms argue that they are prohibited from providing the work papers by Chinese law. Ultimately, the SEC may need to decide if the companies audited by these firms should be allowed to trade in the US securities markets. A negative answer to this question could have serious consequences for other issuers, including US public companies with operations or affiliates in China.

b. PCAOB Chairman James Doty reported that the Board is continuing to develop its Global Network Firm Inspection Program for accounting firms, and it is adapting its standard-setting process to the new legislative and regulatory requirements for audits of companies that qualify as emerging growth companies under the JOBS Act.

c. PCAOB Chief Auditor Martin Baumann noted that the JOBS Act creates a new class of issuers, and it could result in the establishment of another set of auditing standards in the US, since the Act says that PCAOB’s standards will not apply to emerging growth companies unless the SEC determines that the standards are both in the public interest and promote efficiency, competition, and capital formation.

d. Director of SEC’s Division of Corporation Finance Meredith Cross mentioned several areas of rule-making that relate to cross-border oversight and capital formation by growing companies.

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The information in this MHM Messenger is a brief summary and may not include all the details relevant to your situation. Please contact your MHM service provider to further discuss the impact on your financial statements.

• The disclosures about conflict minerals from South Africa and payments to governments by resource extraction issuers are controversial. The SEC recently issued final rules on both, and the Division of Corporation Finance expects to issue more guidance soon in response to the many questions about the requirements.

• Additional releases are expected soon on more parts of the JOBS Act, including a recommendation on general solicitations and proposal on crowdfunding.

• Guidance is also expected in the near future on the Notice that must be filed with the SEC under the Iran Threat Reduction and Syria Human Rights Act of 2012. The Act requires quarterly disclosures by companies about their (or their affiliate’s) engagement in certain business activities relating to Iran. This requirement takes effect for periodic reports required to be filed after February 6, 2013.

• Two longer-term projects of interest to the Division of Corporation Finance are: (a) evaluating whether the rules for foreign private issuers should be adjusted to be more like the requirements for domestic issuers. This rule-making would reflect the changing demographics of the population of non-US issuers and the fact that it is more likely now than in the past that some issuers may lack home-country disclosure rules to rely on; and (b) evaluating the potential for expanding some offering reforms, such as making “file and go” available to mid-sized companies.

e. Howard Scheck, Chief Accountant for the SEC’s Division of Enforcement, reminded auditors that the Division of Enforcement is continuing to pursue potential violations of Section 10A of the Exchange Act. Section 10A requires auditors to have policies and procedures regarding detection of illegal acts, and it requires auditor reporting to the Commission under certain circumstances. Mr. Scheck noted that there may be an expectation gap reflected in a recent study that shows boards and audit committees are taking comfort from their company’s audit report that there are no violations of the Foreign Corrupt Practices Act (FCPA). In practice, though, the SEC’s records show that reports of violations generally do not come from the auditors. Mr. Scheck added that the Division of Enforcement talked to major accounting firms recently about the steps they are taking and their findings with regard to corporate compliance programs. One important caveat for companies: compliance programs should involve accountants, not just attorneys, because of the books-and-records provision of FCPA. The SEC and DOJ recently published a resource guide on the Foreign Corrupt Practices Act that is described in the appendix to this Messenger.

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