SEC & PCAOB leadership issued this joint statement on "emerging market" disclosure, financial reporting, audit, and other risks that is a must-read for all SEC reporting companies based - or with significant operations - in China and other emerging markets.
Among other key excerpts are those specifically concerning risk disclosure expectations that include prominence, specificity, and the use of plain English:
Companies that have significant operations in emerging markets often face greater risks and uncertainties, including idiosyncratic risks, than in more established markets. Issuers reporting with the SEC should clearly disclose these matters to investors. Boilerplate disclosures generally are not useful or sufficient in these circumstances. For example, issuers should carefully consider the environment in which the company operates in assessing whether the company has sufficient controls, processes and personnel to address its accounting or financial reporting issues. These potentially unique operating considerations also should be considered and reflected in financial and operational disclosures more generally, including disclosures of material risks, trends, uncertainties, accounting judgments and other items that are material to an investor.
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Issuers based in emerging markets should consider providing a U.S. domestic investor-oriented comparative discussion of matters such as (1) how the company has met the applicable financial reporting and disclosure obligations, including those related to DCP and ICFR and (2) regulatory enforcement and investor-oriented remedies, including as a practical matter, in the event of a material disclosure violation or fraud or other financial misconduct more generally.
The insufficiency of boilerplate disclosure to reflect the more substantial and company-specific risks associated with emerging markets goes hand-in-hand with the statement's emphasis on disclosing with specificity. While the statement assertedly is not intended to discourage emerging market activity, it is aimed at acknowledging the comparatively greater risks and uncertainties relative to the US reporting scheme and prompting full disclosure to promote the SEC's protection of investors, preservation of market integrity, and facilitation of capital formation - consistent with its tripart mission.
This post first appeared in this week's Society Alert!