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US Securities and Exchange Commission

GOP Bill Seeks New Disclosure for U.S.-Listed Chinese Companies

Thomson Reuters Tax & Accounting  

Thomson Reuters Tax & Accounting  

By Bill Flook

Rep. Ann Wagner, a Missouri Republican, on May 22, 2020, introduced legislation that would impose a host of new disclosures on Chinese companies traded on U.S. exchanges and delist companies that don’t meet the transparency requirements.

H.R. 7007, the Compensation for Americans Act, is the latest in a series of measures designed to put pressure on Chinese authorities, who today refuse to allow U.S. audit inspectors to review the audits of U.S.-listed Chinese companies, leading to widespread and ongoing violations of the Sarbanes-Oxley Act of 2002.

The new disclosure requirements are among a long list of steps Wagner’s bill would take to crack down on China amid the COVID-19 crisis.

“It is undeniable that China intentionally misrepresented and suppressed vital information that could have mitigated the spread of the coronavirus. Instead of acting in the global interest, the Chinese government took deliberate action that created the worldwide crisis we find ourselves in today,” Wagner said in a statement. “These reckless acts directly contributed to the deadly pandemic that has killed nearly 100,000 Americans and unleashed an economic tragedy that has impacted communities in every corner of the United States.”

H.R. 7007 would direct the SEC to keep a public list of Chinese companies with audits that were prepared by a foreign public accounting firm that cannot be inspected or investigated by the PCAOB. Among other requirements, Chinese companies would also need to disclose to investors “whether they have been audited by foreign public accounting firms; the percentage of shares owned by Chinese government entities; whether Chinese government entities have a controlling interest in the issuer; and the name of any official of the Chinese Communist Party who is a member of the board of directors of the issuer,” according to a fact sheet provided by Wagner.

The bill comes as a separate measure – the Holding Foreign Companies Accountable Act – picks up momentum on Capitol Hill more than a year after it was first introduced in the Senate by Sens. Chris Van Hollen, a Maryland Democrat, and John Kennedy, a Louisiana Republican.

Under the Holding Foreign Companies Accountable Act, a foreign company traded on a U.S. exchange would be deslisted if the PCAOB is unable to inspect its auditor for three straight years. Companies would also be required to make new disclosures on the extent of state control over them.

The Senate on May 20 passed its version of the measure (S. 945) by unanimous consent. In the House, Rep. Brad Sherman, a California Democrat, introduced the companion bill (H.R. 7000) on May 22.

House Speaker Nancy Pelosi, in an interview with Bloomberg Television, said the House would review the bill. President Donald Trump has also said his administration is “looking at” enforcing U.S. audit regulations on Chinese companies listed on U.S. exchanges.

Critics of China’s policy of refusing U.S. audit inspectors have pointed to a recent accounting scandal at Luckin Coffee Inc., a Chinese coffee chain that recently admitted to fabricating hundreds of millions of dollars in 2019 sales. Shares of the company, which trade on the NASDAQ under the ticker symbol LK, have cratered as a result of the scandal. The exchange plans to delist the stock.

“Had this legislation already been signed into law, U.S. investors in Luckin Coffee likely would have avoided billions of dollars in losses,” Sherman said in a statement.

 

This article originally appeared in the May 27, 2020 edition of Accounting & Compliance Alert, available on Checkpoint.

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