Under Sarbanes-Oxley, public company auditors are required to be registered with the Public Company Accounting Oversight Board (PCAOB). The PCAOB is required to conduct a continuing program of inspections to assess the degree of compliance of each registered public accounting firm with Sarbanes-Oxley, SEC and PCAOB rules, and professional standards. PCAOB inspections of audit firms are supposed to be conducted annually for audit firms that regularly audit more than 100 issuers, and at least once every three years for all other auditing firms.

For various reasons, the PCAOB has not been able to conduct examinations of a number of non-US auditors.1 In at least one comment letter, the SEC staff stated that as a result of the inability of the PCAOB to perform its inspection of the issuer's auditor, "investors in the U.S. markets who rely on your auditor's audit reports are deprived of the benefits of PCAOB inspections of auditors." The SEC required the issuer to include in future filings a separate risk factor explaining how the PCAOB's inability to inspect the non-US audit firm prevents the PCAOB from regularly evaluating the auditor's audits and quality control procedures.

Issuers should be alert for any potential issues with respect to their auditors. If an issuer's auditor has not been inspected in accordance with the PCAOB rules, or the inspection report notes any deficiencies, the issuer should consider whether a risk factor is appropriate. The issuer may want to review the PCAOB's website, www.pcaobus.org, to view information available regarding its auditor. Prior to including any risk factor in SEC filings relating to an auditor, the issuer should first review the matter with its auditor and legal counsel.

Footnote

1. See, e.g., Issuer Audit Clients of Non-U.S. Registered Firms in Jurisdictions where the PCAOB is Denied Access to Conduct Inspections, available at http://tinyurl.com/dx4qx74.

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