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Frequently Asked Questions
  When does Nasdaq apply additional criteria based on a company's auditor?
Identification Number 1696

Accurate financial statement disclosure is critical for investors to make informed investment decisions.  Company management prepares these financial statements, which are included in a company’s SEC filings.  Nasdaq rules and federal securities laws require that annual financial statements be audited by an independent public accountant that is registered with the Public Company Accounting Oversight Board (PCAOB). Based on its independent audit of the evidence supporting the amounts and disclosures in the financial statements, the auditor expresses an opinion on whether the financial statements present fairly, in all material respects, the company's financial position, results of operations and cash flows. 

The auditor, in turn, is subject to inspection by the PCAOB, which assesses compliance with PCAOB and SEC rules and professional standards in connection with the firm's performance of audits.  The PCAOB’s inspection includes a review of certain portions of selected audit work performed by the inspected firm and a review of certain aspects of the firm's quality control system. In general, the PCAOB inspects auditors either annually or triennially, depending upon whether the firm conducts audits for more than 100 issuers (annual inspection) or 100 or fewer issuers (triennial inspection).  According to the PCAOB, “PCAOB inspections may result in the identification of deficiencies in one or more of an audit firm’s audits of issuers and/or in its quality control procedures which, in turn, can result in an audit firm carrying out additional procedures that should have been performed already at the time of the audit.  Those procedures have sometimes led to the audited public company having to revise and refile its financial statements or its assessment of the effectiveness of its internal control over financial reporting.  In addition, through the quality control remediation portion of the inspection process, inspected firms identify and implement practices and procedures to improve future audit quality.”

Nasdaq and investors rely on the work of auditors to provide comfort that the financial statements provided by the company are free of material misstatements.  Nasdaq and investors further rely on the PCAOB’s critical role in overseeing the quality of the auditor’s work.  As a result, given the importance of accurate financial statements and related disclosures to investors and prospective investors and to Nasdaq’s evaluation of companies, in order to preserve and strengthen the quality of and public confidence in the Nasdaq market, and in order to enhance investor confidence, Nasdaq believes that it may be appropriate, in certain situations, to rely upon Listing Rule 5101 to deny initial or continued listing or to apply additional and more stringent criteria when the auditor of a Nasdaq-listed company has not been subject to a PCAOB inspection.  For more information on the importance of effective audits and regulatory oversight relating to financial statements, please see Statement on the Vital Role of Audit Quality and Regulatory Access to Audit and Other Information Internationally, SEC Chairman Jay Clayton, SEC Chief Accountant Wes Bricker and PCAOB Chairman William D. Duhnke III.

In determining whether to apply additional and more stringent criteria, including potentially prohibiting a company’s listing based on the status of its audit firm, Nasdaq will consider, among other things:

  • whether the company’s audit firm has been inspected by the PCAOB and the results of that inspection, including whether the auditor has failed to respond to any requests by the PCAOB;
  • whether the audit firm can demonstrate that it has adequate personnel in the offices participating in the audit with expertise in applying U.S. GAAP and GAAS in the company’s industry;
  • the scope of the firms’ training program for personnel participating in the company’s audit; and
  • for non-U.S. firms, whether the firm is part of a global network or other affiliation of individual firms, where the firms draw on globally common technologies, tools, methodologies, training and quality assurance monitoring.
When the PCAOB cannot inspect a company’s auditor, Nasdaq may also apply additional and more stringent criteria to obtain comfort that the company satisfies the financial listing requirements and is suitable for listing.  Examples of such criteria could include requiring higher equity, assets, or earnings than otherwise required under the listing standards to assure that the company truly meets the financial listing requirement. Nasdaq could also require that any offering be underwritten on a firm commitment basis, which typically involves more due diligence by the broker-dealer than would be done in connection with a best-efforts offering.  Nasdaq could also require companies to impose lock-up restrictions on officers and directors to allow market mechanisms to determine an appropriate price for the company before such insiders can sell shares.

In addition, Nasdaq would typically deny listing or delist a company if the company’s auditor is newly formed and has therefore not yet undergone a PCAOB inspection cycle or if the company’s auditor otherwise does not demonstrate sufficient resources, geographic reach or experience as it relates to the company’s audit, including in circumstances where a PCAOB inspection has uncovered significant deficiencies in the audit firms’ conduct in other audits or in its system of quality controls.

In assessing these issues, Nasdaq may seek to communicate directly with the audit firm and may request certifications from the audit firm related to the items outlined above.
Publication Date*: 6/10/2019 Mailto Link Identification Number: 1696
material_search_footer*The Publication Date reflects the date of first inclusion in the Reference Library, which was launched on July 31, 2012, or a subsequent update to the material. Material may have been previously available on a different Nasdaq web site.
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