The most extensive audit of Chinese companies listed on the U.S. stock exchange has begun by the Public Company Accounting Oversight Board.
Matthew P. Goodman, senior vice president for economics with the Center for Strategic and International Studies, answered questions to explain the audit of more than 160 Chinese companies in a Sept. 28 CSIS release. The China Securities Regulatory Commission and the Chinese Ministry of Finance agreed to a detailed framework allowing the investigation to occur.
"Washington owes much of its bargaining power in the negotiations to a keen desire on the part of Chinese companies to continue listing in the United States, where they can access the world’s deepest and most liquid capital markets and raise funds in dollars at some distance from Beijing’s supervision,” Goodman said in the report. "By increasing the risk of forced delistings, the HFCAA threatens to permanently shut many top Chinese firms off from such privileges.”
Although some Chinese companies are incentivized to remain U.S.-listed, others might decide the cons of this audit outweigh the pros, the release reported.
“But while the CSRC states that ‘keeping Chinese companies listed on the U.S. markets is an all-win arrangement,’ other powerful regulators in Beijing, especially party-led organizations such as the Cyberspace Administration of China, could judge the national security risks of data sharing to outweigh the economic benefits,” Goodman said, according to the release.
Goodman noted political pressure from both sides could collapse the audit, which is expected to take as long as 10 weeks, according to the release.
Some Chinese firms utilized workarounds and loopholes before the deal, according to the report. Alibaba announced in July that it would switch its primary listing from New York to Hong Kong, even though the majority of its trading volume remains in New York. Some firms listed shares on other foreign stock exchanges, such as Singapore's or London's, a move that Chinese regulators facilitated.
The process is still in very early stages, Reuters said in an Oct. 4 report. PwC Global Chairman Bob Moritz said the process will likely take months to complete.
"We've got a number of months to go yet before the conclusions are reached. We are continuing to share the information that is allowable," Moritz said in the Reuters report.
The Chinese affiliate of Deloitte was fined $20 million in late September by the U.S. Securities and Exchange Commission after discovering the firm allowed some foreign companies listed on U.S. exchanges to conduct their own audits, Reuters reported Sept. 29. SEC Chair Gary Gensler said the regulator found that Deloitte-China fell far short of professional auditing requirements in component audits of Chinese operations of U.S. issuers and audits of Chinese companies listed on U.S. exchanges.
“Investors in U.S. markets should be protected — and have trust in a company's financial numbers — regardless of whether an issuer is foreign or domestic,” he said, according to Reuters.
