Travel restrictions related to the coronavirus outbreak could limit the work of external auditors, possibly leading to incomplete reports, late corporate filings or last-minute scrambles for deadline extensions, securities lawyers and former regulators say.
Governments around the world have imposed entry restrictions on visitors from China, while major airlines canceled flights to China. The Big Four accounting firms, which conduct audits for many of the biggest U.S. public companies, have also imposed travel restrictions on employees.
PricewaterhouseCoopers has said it would cancel employee and partner travel to mainland China and surrounding regions. Ernst & Young has said employees should stay home for several weeks after traveling to China. KPMG’s U.S. division prohibited all business travel to mainland China. Deloitte Touche Tohmatsu urged employees to indefinitely defer nonessential travel to China, a spokeswoman said.
The restrictions raise a question for U.S. companies preparing regulatory filings that depend on independent audits of operations in affected areas: What happens when auditors can’t travel?
“There’s tremendous advantage for an auditor to travel, to better understand the local environment and the client,” said
senior affiliate of
forensic and litigation consulting division and former director of registration and inspections at the Public Company Accounting Oversight Board.
Not only is it an advantage, it is also sometimes required. U.S. audit standards require some components—generally inventory, among them—to be physically counted. Travel restrictions could make those kinds of tasks more daunting—especially such jobs in restricted zones, such as warehouses in or near the Chinese city of Wuhan, the epicenter of the fast-spreading coronavirus epidemic, which has killed at least 360 people and infected more than 17,000.
The independent counting of inventory represents a crucial component of companies’ balance sheets. If auditors can’t access material inventory for physical audits and complete their work, they likely wouldn’t submit a report.
To submit complete financial statements, executives could have to negotiate deadline extensions with regulators or, in some cases, devise ways to provide sufficient disclosures in lieu of on-site inspections by auditors. They could also need to request deadline extensions for certain filings.
Public accounting firms continue to monitor and will coordinate as necessary with regulators, said
senior managing director of professional practice and member services at the Center for Audit Quality, a nonprofit that represents public-company auditors.
Some companies may not be affected, particularly if they are being audited by a large accounting firm that relies on an international network of affiliates to perform audits in far-flung corners of the world. The Big Four firms, for instance, often operate this way.
Smaller firms with limited international connections still can do some audit work remotely. Elements of public-company audits can largely be performed through the review of documents electronically and interviews of company personnel.
“Auditors might have some reservations about eliminating the face-to-face aspects of the audit,” said
a retired partner at law firm Baker McKenzie and former interim chairman of the PCAOB.
Companies with substantial operations in China have been bracing for the impact on their businesses and, by extension, their reporting.
U.S. public companies can obtain a deadline extension for financial reports with the Securities and Exchange Commission, Mr. Goelzer said. The regulator permits an extension of as many as 15 calendar days for annual reports and as many as five calendar days for quarterly reports.
Companies that miss filing dates often aren’t allowed to use certain simplified registration forms that the SEC permits some businesses to use if they have met other reporting requirements. The SEC can also revoke securities registrations of companies that repeatedly file their annual or quarterly reports past deadline.
In certain cases, if enough companies are affected by an event or circumstances, the SEC might issue a deadline extension for affected parties. The SEC provided relief for companies amid Hurricane Michael in 2018, for instance, by extending filing deadlines for certain reports and exempting some affected companies from certain provisions of federal securities laws.
The SEC is monitoring the potential effect of the coronavirus outbreak on companies and other market participants to determine what guidance or assistance may be appropriate, a spokeswoman for the regulator said.
“This is an uncertain issue where actual effects will depend on many factors beyond the control and knowledge of issuers,” SEC Chairman
said in a statement last week. “However, how issuers plan for that uncertainty and how they choose to respond to events as they unfold can nevertheless be material to an investment decision.”
Authorities could also go as far as allowing for partial or incomplete filings in addition to extensions, said
a partner at law firm Crowell & Moring LLP and former chief of staff at the U.S. Department of Homeland Security.
“Regulators will look at the realities on the ground—the specific facts of what can and can’t be done,” Mr. Rosen said.
contributed to this article.
Write to Mark Maurer at email@example.com
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