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Law360 (February 19, 2020, 6:52 PM EST) -- The U.S. Securities and Exchange Commission on Wednesday urged U.S.-listed companies with operations in China to consider whether coronavirus threats should be disclosed and to work with their auditors to ensure that their financial reporting remains robust, given the circumstances.
The SEC's statement, led by Chairman Jay Clayton and other regulatory officials, is the most extensive to date in terms of guiding how companies should disclose coronavirus-related risks. Wednesday's statement follows SEC efforts that predate the coronavirus outbreak calling attention to audit quality problems involving U.S.-listed firms with operations in China.
Regulators acknowledged that describing the impact of the virus outbreak on business operations remains difficult and will vary according to different companies and industries.
"This remains a dynamic situation where the effects of any particular company may be hard to asses or predict, because actual effects may depend on factors beyond the control and knowledge of issuers," said the statement, signed by Clayton, SEC Division of Corporation Finance Director Bill Hinman, SEC Chief Accountant Sagar Teotia and Public Company Accounting Oversight Board Chairman William Duhnke. "However, how issuers plan and respond to the events as they unfold can be material to an investment decision."
Regulators further said issuers should work with their auditors and the audit committees of their boards of directors to ensure that their financial reporting, auditing and review processes are as robust as practicable, given events in China. The SEC said companies and their auditors should consider whether events should be disclosed in notes attached to their financial statements
The SEC also said it will consider requests to grant relief from deadlines when filings cannot be completed on time because of events beyond the issuer's control. Regulators noted that audit firms could face limited access to information and personnel, which could affect audit quality.
The coronavirus outbreak prompted all levels of the Chinese government to take preventive measures to curb its spread, including extending the Lunar New Year holiday, quarantining the city of Wuhan — where the virus originated — and blockading highways and local roads. Many global corporate giants have curtailed employee travel to China since the outbreak last month.
This SEC statement applied to companies that are listed on U.S. exchanges but maintain significant operations in China. Companies that do not directly operate in China but have suppliers, distributors or customers based in China should also take heed, the SEC said.
Public companies are required to warn investors of plausible risks that could affect their operations, though quantifying risks related to ongoing and unpredictable events is often challenging. The SEC encouraged issuers and their advisers to contact its staff if they need guidance. The SEC said it may grant relief from certain requirements on a case-by-case basis.
Wednesday's statement follows Jan. 30 remarks by Clayton indicating that the SEC would monitor coronavirus-related disclosures and provide assistance to companies.
The matter has caught the attention of other regulators, as well. The U.K.'s audit watchdog, the Financial Reporting Council, on Tuesday told audit firms to inform investors of specific company accounts that may be affected by the coronavirus epidemic in China.
The SEC also said that it has been meeting top U.S. audit firms since November regarding hurdles that such firms face in terms of accessing information they need to develop quality audits of U.S.-listed firms with significant operations in China.
The SEC added that the PCAOB, which oversees the audits of public companies, continues to be restricted in inspecting the audit work of PCAOB-registered firms in China compared with access to other countries. The SEC is urging audit firms to increase resources devoted to their quality-control process, given this situation.
The SEC and other financial regulators first called attention to concerns about their interactions with China in December 2018, alleging that obstacles posed by Chinese officials were making it hard to fully vet the books of Chinese companies listed on U.S. exchanges.
China Securities Regulatory Commission officials could not immediately be reached for comment on Wednesday.
--Additional reporting by Joanna Faulkner. Editing by Michael Watanabe.
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