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U.S. Asks for More Transparency from Chinese Companies


— August 19, 2020

All Chinese companies must make sure they are meeting U.S. exchange standards beginning January 1, 2022.


The Securities and Exchange Commission and Treasury (SEC) recently announced Trump administration officials are asking the president to delist Chinese companies trading on U.S. exchanges that fail to meet U.S. auditing requirements by January 2022.  The decision followed President Donald Trump’s efforts to enlist a group of advisors, including Treasury Secretary Steve Mnuchin and SEC Chairman Jay Clayton, with drafting a report including recommendations to protect U.S. investors from Chinese companies whose audit documents are not shared with U.S. regulators.  The move is also likely tied to coronavirus concerns after it was discovered the sickness began in a Wuhan, China.

There has been increasing pressure from Congress to crack down on Chinese companies selling in the U.S. that do not adhere to regulations domestic companies are expected to follow.  Oftentimes, Chinese goods are imported to consumers at a much lower price tag.

“We are simply leveling the playing field, holding Chinese firms listed in the U.S. to the same standards as everyone else,” a Treasury official said.

U.S. Asks for More Transparency from Chinese Companies
Photo by Olivia Colacicco on Unsplash

The U.S. Senate unanimously passed a bill in May of this year meant to prevent some Chinese companies from listing their shares on U.S. exchanges unless they follow audit and regulatory standards.  Democratic Senator Chris Van Hollen, who sponsored the bill, called it “an important first step,” but said “without the added teeth of our bill, this report alone does not implement the requirements necessary to protect everyday American investors.”

The legislation would give Chinese companies until January 1, 2022, to comply with the Public Company Accounting Oversight Board (PCAOB)’s standards by providing access to their audit papers.  This will override a 2013 agreement between the two countries to establish a process for the PCAOB to obtain documents for enforcement cases against foreign auditors.  Under the new agreement, a co-audit may also be undertaken by a U.S. parent company of the China-based affiliate tasked with auditing the Chinese firm.  Those companies that seek to list their products for sale in the U.S. for the first time must immediately meet the newly imposed standards.

The report states, “Any company listed in the United States must be an SEC reporting company, and the audit of the financial statements of any such reporting company must be conducted by a firm (whether a U.S auditor or a non-U.S. auditor) registered with, and subject to the jurisdiction of, the PCAOB.  PCAOB registration includes undergoing regular PCAOB inspections to assess auditor compliance with legal and professional standards.”  China responded, “the two countries have good cooperation in monitoring publicly listed firms.”

Foreign ministry spokesperson Wang Wenbin said, “The current situation is that some U.S. monitoring authorities are failing to comply with their obligations, and what they are doing is political manipulation – they are trying to force Chinese companies to delist from U.S. markets.”

However, following this initial comment, China indicated the country is hoping to resolve the issue with the U.S. through continued conversation.

The SEC report also recommends “requiring greater disclosure by issuers and registered funds of the risk of investing in China, as well as mandating more due diligence by funds that track indexes and issuing guidance to investment advisers about fiduciary obligations surrounding investments in China.”

Sources:

Trump advisers urge delisting of U.S.-listed Chinese firms that fail to meet audit standards

Update for Chinese SEC Reporting Companies: President Trump Mandates Report on PCAOB Access and Investor Protections

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