New Accounting Rules Facilitate SEC Filings by Foreign Registrants

To facilitate the growth in the number of foreign companies gaining access to U.S. capital markets, the SEC provides a separate integrated disclosure system for foreign private issuers. This disclosure system includes a number of accommodations of SEC practices and policies for non-U.S. reporting companies. In January 2000, the SEC Practice Section (SECPS) adopted rules that allow foreign registrants and foreign associated accounting firms greater opportunities to utilize the connections and talents of U.S. associated accounting firms in the preparation of their filings with the SEC.[1]

These U.S. associated accounting firms play the role of filing reviewer for the foreign registrants and foreign associated accounting firms. Membership in the SECPS and participation in its Peer Review program are a voluntary part of the self-regulatory activities of the American Institute of Certified Public Accountants and the Public Oversight Board that are intended to insure good quality practice before the SEC.

Under the new SECPS rules, it is expected that foreign registrants can enhance the quality and improve the timeliness of their filings with the SEC. Both of these benefits should enable to foreign registrants to have their merger and acquisition filings cleared more quickly and with fewer problems when reviewed by the SEC staff. In their role as filing reviewers, U.S. associated accounting firms can use their intimate knowledge of SEC rules and guidance as well as their relationships with SEC staff members to navigate this administrative process.

New Role for U.S. Associated Accounting Firms

The new SECPS rules now allow registrants to make confidential submissions by a designated filing reviewer within an SECPS accounting firm or an affiliated international organization knowledgeable about United States accounting practices, including U.S. GAAP, U.S. GAAS, SEC auditor independence rules and SEC reporting requirements. These new changes eliminate the need for foreign accounting firms to go through the arduous process of joining the SECPS by using affiliated U.S. accounting firms.

To facilitate the filing of cross border transactions, the SEC has accommodated foreign registrants in number of ways. An important accommodation provided by the SEC concerns the preparation of financial statements in accordance with the foreign issuer's country of origin accounting principles rather than under U.S. GAAP. Those financial statements prepared under accounting principles other than U.S. GAAP are required to include a reconciliation of the foreign issuer's accounting principles to U.S. GAAP. U.S. accounting firms generally participate with many foreign associated accounting firms to help complete the reconciliation to U.S. GAAP using procedures, which allow them to fully understand the accounts, and transactions comprising a foreign registrant's financial statements. Under these new SECPS rules, foreign registrants can utilize the time spent in the preparation of the reconciliation to further enhance the quality and improve the timeliness of the entire submission to the SEC.

Purpose of the New Filer Review Process

The SEC generally requires the involvement of accounting firms in the registration process through the audits of registrant's financial statements. Both the SECPS and the SEC have the goal to institute procedures to involve those accounting firms that can be expected to be most knowledgeable about current U.S. accounting practices and interpretations. SEC rules do not require an auditor to be a member of the SECPS. However a foreign auditor must meet all the requirements of Article 2 of Regulation S-X and demonstrate sufficient knowledge and experience in applying United States Generally Accepted Accounting Principles (U.S. GAAP), United States Generally Accepted Auditing Standards (U.S. GAAS), SEC financial reporting rules, and SEC independence requirements.

The SEC's goal in adopting the new filer review process is not only to promote cross-border transactions but also to allow registrants and their auditors' assurance that appropriate competence is brought to disclosures before materials are filed or submitted. The use of a filing reviewer will not only provide the foreign registrant and the foreign associated accounting firm expertise in preparing competent disclosures but will help expedite filings by anticipating questions, navigating problem areas and assisting in the protocol of the SEC's review process.

What is a Filing Review?

A filing reviewer performs review procedures on behalf of its foreign affiliated accounting firm, which has audited the financial statements of the foreign registrant. Once a filing has been prepared by the foreign registrant and audited by its accounting firm, it is then sent to the filing reviewer firm. The filing reviewer performs at least the minimum procedures enumerated below and allows the foreign affiliated accounting firm and the foreign registrant to implement the suggested changes to the document that will be filed with the SEC.

The filing reviewer procedure is not intended to specify or alter the nature or scope of an accounting firm's policies or procedures, nor to specify or alter how an accounting firm selects filing reviewers. The purpose of the procedure is to ensure that foreign associated firms appropriately involve their designated filing reviewer prior to submission of draft registration statements or other filings with the SEC. The staff will consider deferring the review of a draft submission where the application of the firm's policies and procedures to that submission cannot be confirmed.

SEC's Review of Foreign Registrant Filings

In an effort to facilitate cross-border offerings and listings on the U.S. stock exchanges, the SEC's staff provides an expedited review of foreign registrant disclosure documents. Additionally, if requested, the SEC may review and provide comments on the documents on a pre-filing basis and in draft form. Under the new SECPS rules and with a greater emphasis on expediting the review process for foreign filers, the SEC staff will request the name of the designated filing reviewer whom it may contact with any questions concerning the application of policies and procedures to the filing or draft submission.

In a typical review of a filing, the SEC accounting staff conducts an initial review using a junior staff member who is overseen by a senior staff member. Upon completing the initial review, both the junior and senior accounting staff members coordinate with the SEC's legal reviewers to issue comments in a written letter addressed to the registrant. Any complex or special accounting issues are resolved by the front office of the Division of Corporation Finance or by the Office of the Chief Accountant. Typically, any complex or special accounting issues are resolved at the request of the registrant on a pre-filing basis

New Filer Review Process
Prior to commencing its review of a foreign registrant's filing, the SEC staff requests supplemental written confirmation that the SECPS member firm's review procedures were applied to the foreign registrant's submission. Under the new SECPS rules, the minimum procedures to be performed by the filing reviewer should generally include the following

• Reading the foreign registrant's document to be filed with the SEC with particular attention given to compliance as to the form of the financial statements (and related schedules), and auditors' report with the applicable accounting and financial reporting requirements for such filings by the SEC registrant.
  
  
• Discussing with the audit partner-in-charge of the engagement:
  • The engagement team's familiarity with and understanding of the applicable United States auditing, accounting, financial reporting, and independence standards, including independence requirements of the SEC
    
    
  • The significant differences between: (a) the accounting and financial reporting standards used in the presentation of the financial statements included or incorporated in the document to be filed with the SEC and those applicable in the United States, and (b) the auditing and independence standards of the foreign associated firm's domicile country and those applicable in the United States; and
    
    
  • Any significant auditing, accounting financial reporting, and independence matters that come to the attention of the filing reviewer when performing the procedures described above, including how any such matters were addressed and resolved by the audit partner-in-charge of the engagement.

Notes
1. SECPS Rules, Appendix K "SECPS Member Firms with Foreign Associated Firms that Audit SEC Registrants." These rules are at www.aicpa.org/members/div/secps/inmere.htm.