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Federal Register / Vol. 86, No. 234 / Thursday, December 9, 2021 / Rules and Regulations
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Financial reporting quality is in part determined by audit quality. According to some academic studies, PCAOB
oversight has led to improvements in audit quality and to increased investor confidence in the quality of the audited financial statements.99 However, when the PCAOB is unable to inspect some auditors there is a lack of transparency with respect to the audit quality provided by such firms. As a result, there may be uncertainty regarding the reliability of the financial information of issuers audited by firms that are not inspected, which can potentially lead to suboptimal investment decisions by investors.
In addition, academic literature provides evidence of varying types of impact of ownership and control structures on firm value.100 Government ownership, in particular, can be related to both risks and benefits for investors.
Evidence in the literature highlights inefficiencies and expropriation risks as a result of government ownership or control, whereas other studies provide evidence of easier access to Costs, 30 Cont. Account. Res. 482 2013 showing that earnings quality reduces information asymmetry; Partha Sengupta, Corporate Disclosure Quality and the Cost of Debt, 73 Account. Rev. 459
1998 showing that high disclosure quality reduces the cost of debt; Christine Botosan, Disclosure Level and the Cost of Equity Capital, 72
Acc. Rev. 323 1997 finding that disclosure quality reduces the cost of equity for firms with low analyst coverage; Mark E. Evans, Commitment and Cost of Equity Capital: An Examination of Timely Balance Sheet Disclosure in Earnings Announcements, 33
Cont. Account. Res. 1136 2016 finding that firms which consistently disclose balance sheet detail in relatively timely earnings announcements have lower costs of capital compared to other firms;
For a survey of financial reporting research, see Anne Beyer, Daniel A. Cohen, Thomas Z. Lys, &
Beverly R. Walther, The Financial Reporting Environment: Review of the Recent Literature, 50 J.
Account. Econ. 296 2010.
99 See, e.g., Daniel Aobdia, The Impact of the PCAOB Individual Engagement Inspection ProcessPreliminary Evidence, 93 Account. Rev.
53 2018 concluding that both audit firms and clients care about the PCAOB individual engagement inspection process and, in several instances, gravitate toward the level set by the Part I Finding bar; Mark L. DeFond & Clive S. Lennox, Do PCAOB Inspections Improve the Quality of Internal Control Audits?, 55 J. Account. Res. 591
2017 finding evidence consistent with PCAOB
inspections improving the quality of internal control audits by prompting auditors to remediate deficiencies in their audits of internal controls;
Brandon Gipper, Christian Leuz, & Mark Maffett, Public Oversight and Reporting Credibility:
Evidence from the PCAOB Audit Inspection Regime, 33 Rev. Financ. Stud. 4532 concluding that consistent with an increase in reporting credibility after the introduction of public audit oversight, we find that capital market responses to earnings surprises increase significantly.
100 See, e.g., Andrei Shleifer & Robert Vishny, A
Survey of Corporate Governance, 52 J. Fin. 737
1997 discussing both the theory and empirical evidence on the effect of large shareholders on firm value.

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financing.101 Effects from government ownership or control on firm value may be further amplified when the regulatory environment in the foreign jurisdiction is weak, and when there is heightened political risk.102
The required disclosures and submissions will reduce uncertainty about characteristics that may affect firm value and risk and therefore could facilitate investors capital allocation decisions. Some of the information required to be disclosed under the amendments may be otherwise available to investors through other sources or overlap with existing mandated disclosures.103 In such cases, we expect the required disclosures could nevertheless reduce search costs for investors and potentially enhance investor protection. In addition, the submission requirement will provide some reassurance to investors that Commission-Identified Issuers that do not disclose any ownership or control by governmental entities in foreign jurisdictions that prevent PCAOB
inspections are not, in fact, owned or controlled by such entities.
The amendments will impose compliance costs on issuers that may vary based on characteristics of their audit arrangements and ownership structure. Although these compliance costs, in and of themselves, may not be significant for most firms, the costs may nonetheless cause certain issuers to accelerate their response to other aspects of the HFCA Act, such as switching audit firms or exiting the U.S.
markets altogether. Those effects are likely to be much more significant than 101 See, e.g., Ginka Borisova, Veljko Fotak, Kateryna Holland & William Megginson, Government Ownership and the Cost of Debt:
Evidence from Government Investments in Publicly Traded Firms, 118 J. Fin. Econ. 168 2015 showing that during times of firm-specific or economy-wide distress, the dominant effect of state equity ownership is a reduction in the cost of debt, consistent with an implicit debt guarantee of government ownership; Gongmen Chen, Michael Firth & Liping Xu, Does the Type of Ownership Control Matter? Evidence from Chinas Listed Companies, 33 J. Bank. Finance 171 2009 finding evidence that the type of government ownership affects value and performance.
102 See, e.g., Laura Liu, Haibing Shu & John Wei, The Impacts of Political Uncertainty on Asset Prices: Evidence from the Bo Scandal in China, 125
J. Fin. Econ. 286 2017 concluding that political uncertainty is a priced risk as evidenced by stock price reactions following the 2012 Bo Xilai political scandal in China; the study shows amplified effects on prices for state-owned enterprises and politically connected companies; Bryan Kelly, Lubos Pastor &
Pietro Veronesi, The Price of Political Uncertainty:
Theory and Evidence from the Option Market, 71
J. FIN. 2417 2016 finding that options whose lives span political events tend to be more expensive, and that such protection is more valuable in a weaker economy and amid higher political uncertainty.
103 See infra Section IV.B.1.

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the comparatively limited benefits and costs associated with the interim final amendments.
B. Baseline 1. Regulatory Baseline The regulatory baseline for these amendments includes the interim final amendments adopted on March 18, 2021, and the PCAOB Rule 6100, Board Determinations Under the Holding Foreign Companies Accountable Act, adopted the PCAOB on September 22, 2021 and approved by the Commission on November 4, 2021.104
The disclosures and submissions required by the amendments will provide the Commission, as well as market participants, with more readily accessible and comparable information regarding a number of CommissionIdentified Issuers characteristics, namely: 1 The extent of ownership or control by a governmental entity in a jurisdiction where the PCAOB is unable to inspect or investigate completely because of a position taken by an authority in that jurisdiction, 2 the use of a registered public accounting firm in preparation of an audit report that the PCAOB is unable to fully inspect, 3 the presence and identity of any official of the CCP who is a member of the board of directors, and 4 the presence and specific text of any charter of the CCP
contained in the registrants articles of incorporation or equivalent organizing document. We therefore analyze the extent to which such requirements will change existing regulatory requirements or the current practices of potentially affected registrants.
Compliance with the HFCA Act will require disclosures and submissions pertaining to the ownership or control of a registrant by a governmental entity in the foreign jurisdiction of the registered public accounting firm that the PCAOB is unable to inspect or investigate completely. In practice, many registrants already include disclosures similar to the information required by the HFCA Act in the portions of their respective periodic reports pertaining to registrant-specific risks.105 Others provide detailed diagrams to illustrate their ownership structure within their descriptions of business or otherwise seek to inform readers of their VIE arrangements within the financial statements included in 104 See
supra note 10.
example, some registrants may provide these disclosures in response to 17 CFR 229.105
Item 105 of Regulation SK requiring a registrant to disclose a discussion of the material factors that make an investment in the registrant or offering speculative or risky.
105 For
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