House Overwhelmingly Passes PPP Clean-up Legislation –
With a near unanimous vote of 417-1, the U.S. House on May 28 passed the Paycheck Protection Flexibility Act (H.R.7010) that would extend from eight to 24 weeks the time PPP recipients have to spend their funds. Also, under the House bill, borrowers would only have to spend 60% of the aid on maintaining payroll – including salary, health insurance, leave and severance pay – rather than the current 75% rule. In addition, businesses would no longer have to rehire workers by June 30. The remaining 40% could go toward operating costs such as rent and utilities.
This was in response to criticism that the eight-week Paycheck Protection Program (PPP) loan forgiveness period was not long enough. Businesses in many areas of the country have been unable to bring employees back to work due to state and local orders that have extended business shut-downs, or may only have allowed for a partial reopening with reduced operations.
Another problem businesses have been facing are workers who have been reluctant to return while receiving an extra $600 per week in unemployment benefits that was provided by the CARES Act. According to economists at the University of Chicago’s Becker Friedman Institute, about two-thirds of workers on unemployment are earning more from the government aid than they did at their old job.
While the extra $600 benefit is expected to expire by the end of July, both parties are proposing ways to get workers back to work. One Democrat proposal would continue the benefit but reduce it as the unemployment rate improves; a Republican idea would pay a bonus to workers as incentive to return to work.
Senate Majority Leader Mitch McConnell and Sen. Marco Rubio, the chair of the Senate Small Business Committee, have backed the Paycheck Protection Program Flexibility Act. “I hope and anticipate the Senate will soon take up and pass legislation that just passed the House by an overwhelming vote of 417-1 to further strengthen the Paycheck Protection Program so it continues working for small businesses that need our help,” McConnell said Monday in a speech on the Senate floor.
Other provisions of the passed House bill include an extension of the minimum loan term period from two to five years, and would allow companies whose loans are forgiven to delay payment of payroll taxes.
While the House and Senate will eventually need to agree on final language (one sticking point may be the Senate’s reluctance to change the 75% rule) the effort is moving forward with great momentum. It may be a bite-sized piece that all sides can swallow before consideration of another multi-trillion stimulus bill.
Created by Congress as part of the $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act, the PPP funds are generally available to small businesses with 500 or fewer employees.
Although the Small Business Administration processed 14 years’ worth of loans in just 14 days during the first round of funding for the PPP, it was entirely different for the second round, reports CNBC. “After a rush to replenish the program with $310 billion in additional funding, the second funding round began April 27. More than a month into round two, there’s more than $120 billion still left unallocated for small businesses.”
In the Cross Hairs
Senate Passes Bill That Could Oust Chinese Companies From U.S. Stock Exchanges
A long time impasse between the Chinese government and U.S. regulators reached a head last week when the U.S. Senate overwhelmingly approved (by unanimous consent) a bill that would require companies listed on U.S. stock exchanges to certify that they are not under the control of a foreign government. Though the use of the word “companies” is encompassing, make no mistake the target is China-based companies.
If a company can’t show that it is not under foreign government control, or the Public Company Accounting Oversight Board (PCAOB) isn’t able to audit the company for three consecutive years to determine that it is not under the control of a foreign government, the company’s securities would be banned from U.S. stock exchanges.
As U.S./China relations continue to deteriorate, several other motivations are driving this legislation. At its core, however, is a longstanding refusal by Beijing to allow the PCAOB to examine audits of companies whose shares trade on U.S. exchanges or other platforms.
U.S. accounting firms that audit public companies are subject to review and oversight by the PCAOB – but not the accounting firms operating out of China. Unlike other countries, China has never given U.S. regulators routine access to audit records needed to review the quality of financial accounting, according to U.S. officials, reports the WSJ. That represents about 200 companies with a total market value exceeding $1.4 trillion, according to S&P Global Market Intelligence.
Even without additional legislation, the SEC and the PCAOB already have plenty of authority. Under the rules of the SEC, a registrant must be audited by a firm registered with the PCAOB. If the PCAOB cannot conduct inspections of those audit firms, the PCAOB may de-certify them from performing future audits. If this were to happen, it is possible that all U.S. exchange listed Chinese companies could be delisted as they would no longer have an auditor and thus could not meet public company audit requirements. Further, not only are the listings of these particular companies in question, the audits of large multi-national companies that have significant operations in China may also be in jeopardy.
The U.S. and China have remained at odds over the years but the inspection issue heated up last year as the two nations clashed over a new trade deal. Lawmakers voiced concern that some of China’s largest corporations were receiving billions of investment dollars from U.S. pension funds and college endowments.
CNBC is reporting greater alarm that American money is bankrolling efforts by Chinese technology giants to develop leading positions in everything from artificial intelligence and autonomous driving to internet data collection.
House leaders are discussing the legislation as well. Speaker Nancy Pelosi told Bloomberg Television last week that since it passed the Senate with overwhelming support from members of both parties and no debate, the House would have to give it careful consideration. “We’ll review it in the House. I’ve asked my committees to take a look.”
On the same day, however, Democrat Representative Brad Sherman of California introduced companion legislation in the House, an indication of bipartisan support.
SEC Chairman Jay Clayton told the WSJ that the Senate legislation offers a new way to get China to comply with PCAOB requirements. The companies and their auditors would have three more years to comply with inspection requirements-or face delisting from Nasdaq or NYSE. “The Senate bill is a legislative attempt to get China to comply with the oversight requirements. The status quo is not acceptable,” he said.
In an interview on Fox Business Network’s “Mornings with Maria,” President Trump said he was looking “very strongly” at imposing such a rule on Chinese companies, but added “Let’s say we do that. So what are they going to do? They’re going to move their listing to London or someplace else. You see?”
Auditing the Audit Firms
PCAOB Upgrades Its Inspection Report
In one of the biggest changes in the 15 year history of the PCAOB, the board has revamped the format of its inspection report. Each report involves the findings of PCAOB inspectors, who review the work audit firms perform for clients.
In addition to being more readable, with color charts and graphs, the reports will include more information to provide more transparency. There is now a classification system for audits with deficiencies, and there will be data from the three most recent inspection years for certain audit firms. There also is a new section that discusses instances of non-compliance with PCAOB standards or rules.
The PCAOB was created by the Sarbanes-Oxley Act of 2002 to oversee the audits of public companies and other issuers in order to protect the interests of investors and assure the preparation of informative, accurate and independent audit reports. The PCAOB has four primary functions in overseeing these auditors: registration, inspection, standard setting and enforcement.
One of the PCAOB’s most important powers allows it to conduct periodic inspections of PCAOB-registered public accounting firms. These inspections are conducted on-site, where PCAOB auditors thoroughly review the quality and practices of an accounting firm’s audit work.
Upon completion, a report is generated that cites insufficiencies found. More serious violations may institute an enforcement action, loss of license, and worse.
Because the PCAOB posts all inspection reports online, it is an important tool that companies can use to periodically review the inspection records of their current audit firm, and one they should use as part of their due diligence prior to an audit engagement.
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