By Bill Flook
President Donald Trump, in a May 14, 2020, interview on Fox Business, said his administration is “looking at” enforcing U.S. audit regulations on Chinese companies listed on U.S. exchanges. Trump, however, hedged by suggesting that cracking down on the companies would only lead them to flee to stock exchanges in London or Hong Kong.
Trump’s remarks come amid a long-standing dispute between U.S. audit regulators and the Chinese government, which has barred the PCAOB from inspecting the work of firms that audit U.S.-listed Chinese issuers, over fears over revealing state secrets and other sovereignty concerns.
Asked by Fox Business Host Maria Bartiroma whether he would “force that Chinese companies have to follow accounting rules if they want to be listed on the New York Stock Exchange and the NASDAQ,” the president said “we’re looking at that very strongly.”
Today, an investor who owns stock in a U.S.-listed Chinese company has no way to know if its books are properly reviewed by an independent auditor, depriving that investor of the same transparency that would be available for a U.S.-based company.
The problem has received heightened attention recently following an accounting scandal at Luckin Coffee, a Chinese competitor with Starbucks that recently admitted to fabricating hundreds of millions of dollars in 2019 sales. Following the scandal, the SEC and PCAOB issued a joint statement in late April warning of the risks of investing in U.S.-listed Chinese companies.
(See Regulators Warn Americans About Risks of Investing in Chinese Companies in the April 24, 2020, edition of Accounting & Compliance Alert.)
Luckin announced this week the firing of its CEO Jenny Qian and Chief Operating Officer Jian Liu, and suspended or placed on leave another six employees, as a result of the accounting scandal.
The PCAOB has so far proven hesitant to invoke the so-called “nuclear option” of revoking the registrations of Chinese audit firms, which could lead to the delisting of their clients. But the board still asserts that the firms remain in violation of the Sarbanes-Oxley Act of 2002 as long as they are not open to PCAOB inspections.
Lawmakers have sought, so far unsuccessfully, to force such a confrontation. Sens. Chris Van Hollen, a Maryland Democrat, and John Kennedy, a Louisiana Republican, last year filed S. 945, the Holding Foreign Companies Accountable Act, which would amend Sarbanes-Oxley to bar a foreign company from listing on U.S. stock exchanges if the PCAOB is unable to inspect its auditor for three straight years. Van Hollen, in a May 5 statement to Accounting and Compliance Alert, said that “all publicly listed companies should be held to the same reporting standards.”
Trump, in the Fox Business interview, was somewhat more circumspect.
“Let’s say you want to get tough…everyone wants to be a tough guy, look I’m the toughest guy, but what happens is, so we say you’re going to do that and you are going to follow the rules of the New York Stock exchange or NASDAQ, what do they do?” Trump said. “They say OK we’ll move to London or we’ll go to Hong Kong.”
This article originally appeared in the May 15, 2020 edition of Accounting & Compliance Alert, available on Checkpoint.
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