In this file:
· You Can’t Trust a Chinese Audit
· U.S. must have access to U.S.-listed Chinese firms’ audit documents, lawmakers say
You Can’t Trust a Chinese Audit
Source: Coalition for a Prosperous America (CPA)
June 06, 2019
Note: CPA has endorsed the EQUITABLE Act discussed by Senator Rubio in this op-ed.
A new bill would ensure that U.S.-listed companies comply with American financial reporting rules.
[Marco Rubio | June 4, 2019 | WSJ]
Two decades after its accession to the World Trade Organization, China still uses its intertwined public and private sectors to serve the Communist Party’s mercantilist goals. Many Chinese businesses are listed on U.S. stock exchanges, but Beijing’s intransigence ensures that American investors often don’t get a true picture of those companies’ financial health.
In December 2018, the Securities and Exchange Commission and the Public Company Accounting Oversight Board issued a joint warning to investors about the challenges American regulators face when attempting to conduct oversight of U.S.-listed companies based in China and Hong Kong. While the PCAOB regularly inspects audits of U.S.-listed firms, Beijing consistently challenges their efforts. Chinese law requires that financial records remain in China, and Beijing restricts access to accounting information, citing national security and state secrecy.
Chinese practices raise real risks of fraud. They also undermine the fair and transparent financial reporting at the heart of American capital markets. In their December 2018 joint statement, the SEC and PCAOB acknowledged that “for investors—both U.S. and non-U.S. investors—a U.S. listing carries with it the assumption that U.S. rules and regulatory oversight apply.” When it comes to Chinese companies, that simply isn’t true.
The U.S.-China Economic and Security Review Commission identified 156 Chinese companies, including 11 state-owned-enterprises, that are listed on America’s three largest exchanges. Their combined market capitalization of $1.2 trillion means that significant American capital is exposed to the risk created by China’s lack of economic transparency.
The U.S. can no longer accept a two-tiered system, which is why I’m introducing the Equitable Act—an acronym for Ensuring Quality Information and Transparency for Abroad-Based Listings on our Exchanges—to ensure that all companies on American stock exchanges are subject to the same standards and regulations. When the Equitable Act becomes law, foreign companies that don’t make their audits available for PCAOB review will be subject to increased disclosure requirements. If they don’t comply within three years they’ll be delisted from American stock exchanges.
Ignoring China’s financial misbehavior won’t solve the problem, just as two decades of hoping for economic liberalization and political reform hasn’t stopped the Chinese government from engaging in Orwellian levels of mass surveillance and systemic human-rights abuses. President Trump has created an unprecedented opportunity for the U.S. to use its leverage to extract fair, sustainable and enforceable trade reforms from China. SEC and PCAOB negotiators should use this opening to engage with their Chinese counterparts to bring China into line with international norms.
China has reaped enormous economic rewards while exploiting the freedom and openness of the U.S.-led global order. Now, the U.S. and its allies must send a clear message: If Chinese companies want to be listed on U.S. exchanges, they must comply with American laws and regulations for financial transparency and accountability.
Mr. Rubio, a Republican, is a U.S. senator from Florida.
U.S. must have access to U.S.-listed Chinese firms’ audit documents, lawmakers say
Reporting by David Alexander in Washington and Alun John in Hong Kong; Editing by Lisa Shumaker and Christopher Cushing, Reuters
via Hellenic Shipping News - 07/06/2019
A bipartisan group of U.S. lawmakers introduced a bill to force Chinese companies listed on American stock exchanges to submit to regulatory oversight, including providing access to audits or face delisting.
Chinese authorities have long been reluctant to allow overseas regulators to inspect local accounting firms – including member firms of the Big Four international accounting networks – citing national security concerns.
In spite of a 2013 agreement that ended a stalemate over the issue and allowed U.S. regulators to request audit working papers in China, there have been difficulties in actually gaining access.
At least two Hong Kong-based audit firms have been barred from auditing U.S.-listed companies because they could not produce the papers U.S. regulators asked for.
“Beijing should no longer be allowed to shield U.S.-listed Chinese companies from complying with American laws and regulations for financial transparency and accountability,” Republican Senator Marco Rubio said in a statement.
Last year the U.S. Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board (PCAOB) issued a warning to investors about the difficulties U.S. regulators faced in inspecting the audit work and practices of auditing firms in China that examine U.S.-listed Chinese companies.
There are currently 156 U.S.-listed Chinese companies with a combined market capitalization of $1.2 trillion, including Alibaba Group Holding Ltd, and oil and gas giant China Petroleum & Chemical Corp (Sinopec).
Democratic Senator Bob Menendez, who joined in sponsoring the bill, said on Tuesday: “It’s time for China’s government to play by the same rules as American companies in our financial markets.”
Paul Gillis, professor of practice at Peking University’s Guanghua School of Management, said in a blog post he thought the bill had a good chance of passing and start a three-year countdown for negotiations or for the companies to find another listing home.
“I expect most of them will move their listings to Hong Kong. Mainland exchanges are not ready for most of these companies,” he said.
Many U.S.-listed Chinese firms have complex governance structures such as weighted voting rights (WVR) which are currently not allowed for firms listed on mainland exchanges.
Hong Kong Exchanges and Clearing Ltd changed its rules last year to allow...