Chinese companies listed on U.S. stock exchanges could soon be delisted for failure to comply with U.S. audit standards, after advisers to President Donald Trump issued a report on how to protect investors.
The report was compiled by the President’s Working Group on Financial Markets (PWG), which includes Treasury Secretary Steven Mnuchin and Securities and Exchange Commission (SEC) Chairman Jay Clayton.
Trump asked for the report in early June, seeking recommendations on how to deal with listed Chinese companies that take advantage of U.S. capital markets, but operate under lax accounting standards.
Chinese companies that want to list on U.S. stock exchanges must comply with the new requirements after SEC officials draw up rules to put the recommendation into law.
To avoid delisting, listed Chinese companies could hire a co-auditor that PCAOB determines has sufficient access to the audit documents.
The PCAOB routinely examines audits conducted by U.S.-based accounting firms to ensure public companies’ financial statements are accurate, thus protecting investors and ensuring corporations comply with securities law.
However, for more than a decade, the PCAOB hasn’t been allowed to examine audits and records of China-based companies listed on U.S. exchanges, because Beijing claims their books constitute “state secrets” and can’t be shared with outside parties.
China recently added new restrictions against foreign auditing regulators. In May, the China Securities Regulatory Commission (CSRC) amended local securities law, adding new provisions requiring companies and individuals in China to obtain approval from the security regulatory authority under China’s State Council before they can provide documents relating to securities activities to overseas regulators.
The report also recommends requiring enhanced disclosures by issuers and registered funds about the risks of investing in China, encouraging more due diligence by funds that track indexes, and issuing guidance to investment advisors about fiduciary obligations involving investments in China.
“Now, it’s time for the House to enshrine this policy in law. Short of that, we cannot ensure that firms beholden to Communist China will let U.S. regulators examine their books, which means we can’t protect American retirement and college savings from being exploited,” Kennedy said.
Van Hollen also issued a statement, saying on Aug. 6, “Today’s report is an important first step. But in order to change the status quo, and hold Chinese companies to the same standards as others, we must pass the Holding Foreign Companies Accountable Act.”
“Without the added teeth of our bill, this report alone does not implement the requirements necessary to protect everyday American investors,” he added.
The report illustrates how PCAOB has tried to negotiate with Chinese authorities since 2007. It pointed out how between 2015 and 2017, CRSC rejected PCAOB’s request to inspect the audits of China’s state-owned enterprises (SOEs), such as Chinese tech giant Baidu and e-commerce giant Alibaba.
The PCAOB said its memorandum of understanding (MOU) signed with CRSC and China’s Ministry of Finance in 2013 was “not effective in promoting enforcement cooperation.” Since signing the MOU, PCAOB said China either did not provide any documents at all upon request, or was “so untimely and incomplete as to stifle meaningful progress on the investigation.”
“We have not received any documents since 2015,” the PCAOB stated.