Public Companies: Heed SEC Guidance on Reporting Difficulties in Light of Coronavirus

The World Health Organization has identified 28 countries with confirmed cases of the coronavirus as of last week, including China, the Republic of Korea, and Japan. Various governments, including the United States, have imposed restrictions on travel to and from China. Perhaps more importantly, the Chinese Central Government has imposed various restrictions on the operation of businesses in China, on travel within China, and even on individual departures from residences. While those restrictions vary by region, their ultimate breadth, duration, and impact is unclear. These restrictions have adversely impacted companies in China, companies doing business in China, and companies not located in China that utilize Chinese companies in their supply and distribution chains. In addition, public accounting firms that must travel to various sites in China to perform audit fieldwork have been impeded by travel restrictions and quarantine requirements.

On February 19, 2020, the U.S. Securities and Exchange Commission (SEC) announced its efforts to assist and guide issuers and other market participants that may be affected by the 2019 novel coronavirus. Review the SEC’s full statement, which is entitled Statement on Continued Dialogue with Audit Firm Representatives on Audit Quality in China and Other Emerging Markets; Coronavirus — Reporting Considerations and Potential Relief.

The SEC observed in the statement that “…U.S.-listed companies (including companies based in the U.S., companies based in China and companies based outside of the U.S. but not based in China) may have significant operations in China and other jurisdictions that may be affected by the coronavirus. In addition, companies that do not themselves have operations in China or other potentially affected jurisdictions may depend on companies that do have operations in those jurisdictions, including, for example, as suppliers, distributors and/or customers.” The SEC acknowledges the potential exposure of public companies to the effects of the coronavirus, and the impact that exposure could have on financial disclosures and audit quality, including, for example, audit firm access to information and company personnel. 

The SEC strongly recommends that public reporting companies work with their audit committees and auditors to ensure that their financial reporting, auditing, and review processes are as robust as practicable in light of the dynamic circumstances. The statement emphasizes the SEC’s policy to grant appropriate relief from filing deadlines in situations where an issuer cannot timely fulfill its reporting obligations due to circumstances beyond the issuer’s control, and the SEC encourages issuers and their advisers to contact the SEC Office of the Chief Accountant regarding any request for relief. 

The SEC’s most recent broad-based grant of relief from filing requirements due to circumstances beyond an issuer’s control took place in the aftermath of Hurricane Michael in 2018. At that time, the SEC granted relief to registrants and others required to file schedules, furnish proxy statements, transmit annual or semi-annual reports, and fulfill other requirements under the Securities and Exchange Act of 1934 or the Investment Company Act of 1940. The SEC is currently considering whether it will grant relief on a broad basis or on a case-by-case basis in connection with the burdens imposed on public reporting companies and their auditors by the coronavirus pandemic.

Public reporting companies that may be impacted by the coronavirus pandemic should confer with their legal advisers regarding disclosure issues that may arise as a result of the pandemic, and they should confer with their independent auditors regarding the potential impact of the pandemic on their ability to timely file their required periodic reports.

Lawyers from Schiff’s Securities and Capital Markets Group have had dialogue with senior officials of the SEC’s Division of Corporation Finance regarding these issues. The division has suggested that each public company that may experience an inability to timely file its periodic reports in the future, as a consequence of the coronavirus pandemic, confer with its auditors regarding the issue and request that its auditors contact the chief accountant’s office (Tel: 202-551-5300; Email: oca@sec.gov) to discuss the auditor’s concerns and anticipated difficulties.