Fact Sheet: Proposing Release for PCAOB Rule to Establish HFCAA Framework

May 13, 2021

Overview

The proposed rule would establish:

• 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; and
• The process by which the Board can modify or vacate its determinations.

Background

The Sarbanes-Oxley Act of 2002 (“the Act”) mandates that the Board inspect registered public accounting firms and investigate possible statutory, rule, and professional standards violations committed by those firms and their associated persons. That mandate applies with equal force to the Board’s oversight of registered firms in the United States and in foreign jurisdictions.

Cross-Border Cooperation

Over the course of more than a decade, the Board has worked effectively with authorities in foreign jurisdictions to fulfill its mandate to oversee registered firms located outside the United States. With rare exceptions, foreign audit regulators have cooperated with the Board and allowed it to exercise its oversight authority as it relates to registered firms located within their respective jurisdictions. The norms of international comity have guided those efforts and allowed the Board to work cooperatively across borders, to resolve conflicts of law, and to overcome other potential obstacles. The Board benefits greatly from cross-border cooperation with its international counterparts, and has built constructive relationships that facilitate meaningful oversight.

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.

The HFCAA

Recognizing the ongoing obstacles to Board inspections and investigations in certain foreign jurisdictions, Congress enacted the Holding Foreign Companies Accountable Act, and it was signed into law.

The HFCAA requires that the Board determine whether it 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 HFCAA, among other things, also mandates that, after the Board makes such a determination, the U.S. Securities and Exchange Commission shall require covered issuers who retain such firms to make certain disclosures in their annual reports and, eventually, if certain conditions persist, shall prohibit trading in those issuers’ securities.

Factors for Board Determinations

The Board proposes to use three factors to determine whether it 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:

1. The Board’s ability to select engagements, audit areas, and potential violations to be reviewed or investigated;
2. The Board’s access to, 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; and
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.