WASHINGTON—U.S. regulators are moving forward with a plan to crack down on Chinese companies traded in U.S. exchanges, overturning an agreement signed with Beijing in 2013 under the Obama administration.
The plan will require Chinese companies listed in U.S. exchanges to use auditors overseen by U.S. regulators.
The SEC’s proposal would require the New York Stock Exchange and the Nasdaq to demand that foreign companies comply with U.S. audit standards or bar them from listing shares on exchanges. Those that already have shares trading on these exchanges will be given a certain time to comply to avoid getting delisted.
Chinese firms might potentially be asked to get a second review of their financials by an audit firm based in a country where the auditor regulating body cooperates with the U.S. Public Company Accounting Oversight Board (PCAOB).
PCAOB is a nonprofit organization established by the Sarbanes–Oxley Act of 2002 to oversee the audits of publicly traded companies in order to protect investors. Companies listing their shares on U.S. exchanges must have their books audited by independent public accounting firms registered with PCAOB.
In his statement, Clayton announced the SEC’s intention to “prepare proposals” to strengthen and enhance the oversight of Chinese companies in U.S. exchanges. The decision came after the regulator held a roundtable in July with investors, regulators, and industry experts to discuss issues related to the risks of investing in these companies.
The PCAOB has been unable to inspect audit firms based in China for more than a decade, the report stated.
Hence, the working group recommended enhancing listing standards so that PCAOB can access the audit papers of a listed company. Companies that are unable to satisfy this standard as a result of governmental restrictions as in China may provide co-audit from an audit firm based in another country that provides sufficient access to work papers, according to the report.
To reduce market disruption, U.S. regulators would provide a transition period until Jan. 1, 2022, for currently listed companies to come into compliance with the new standards.
“The new listing standards would apply immediately to new company listings once the necessary rulemakings and/or standard-setting are effective,” the report said.
Preferential Treatment
There were 217 Chinese companies listed on U.S. exchanges, with a total market valuation of $2.2 trillion, as of Oct. 2.These Chinese companies have taken advantage of U.S. capital markets without complying with the same strict audit standards as their U.S. counterparts. Regulators in Beijing have refused to allow audit inspections of U.S.-listed Chinese companies on the grounds of national security and state secrecy.
For example, the MOU stated that “if the requested information and/or consent is not provided by a Party to this agreement, based upon a conflict of laws, the Parties should endeavor to find a solution by consultation.” These lax standards have caused obstacles to the SEC enforcing its rules and regulations on China-based companies and audit firms.
As a result of this concession, U.S. investors, through their pension funds, have been unknowingly transferring wealth from the United States to Chinese companies that don’t comply with U.S. laws. This loophole causes U.S. investors to fund many Chinese companies that are involved in the Chinese Communist Party’s military and espionage apparatuses and implicated in the CCP’s human rights abuses.
Sen. Rick Scott (R-Fla.) applauded the SEC’s plans to enhance the oversight of these companies.
The action will represent the latest challenge for Chinese companies listed on U.S. exchanges.
On Nov. 12, Trump issued an executive order to stop investments in Chinese companies that have close ties to China’s military. The order targeted 31 companies previously designated by the Pentagon as being “owned or controlled” by China’s People’s Liberation Army.
