The U.S. is ratcheting up the rhetoric in the battle to improve the quality of auditing being done on Chinese firms listing or listed on U.S. stock exchanges. The Securities and Exchange Commission and the Public Company Accounting Oversight Board (PCOAB) are trying to get the China Securities Regulatory Commission to require joint inspections of auditors from both the US and China for Chinese firms listed in the US.
The Chinese, claiming concerns over the revelation of “state secrets” are having none of it, seeing the US request as a violation of Chinese sovereignty.
PCOAB Chairman James Doty is apparently getting frustrated with his Chinese counterparts, who have abruptly cancelled bilateral discussions on the issue.
‘We can’t simply pretend that China is different,; he said. ‘You can’t come sell your securities here and ignore the fact that the law requires and people want to know that the auditor’s been inspected.’
Doty is not a paper-tiger bureaucrat that the Chinese can afford to just ignore:
The [PCOAB], which was created by the Sarbanes-Oxley Act of 2002 after accounting scandals contributed to the collapses of Enron Corp. and WorldCom Inc., has authority to de-register China-based auditors, which could start a chain reaction leading to companies being unable to list on U.S. exchanges.
Doty, SEC Chairman Mary Schapiro, and Senator Chuck Schumer all seem to believe that this tough talk will compel China to give in, believing that China is more afraid of losing access to the capital in US markets than they are of giving auditors a glimpse at the dirty laundry of Chinese state-owned enterprises, or even of China’s actual level of defense spending.
They may be right. But many Chinese policymakers, offered the choice of putting state secrets at risk or funding Chinese firms outside of U.S. equity markets, will be motivated to take the latter course. As I noted in an earlier post, the growing complexity of listing Chinese companies in the US and the maturation of China’s own equity markets make the repatriation of offshore listings an increasingly tempting option both for regulators and companies.
Don’t get me wrong: I think that whatever else might be motivating them, Doty, Schapiro, and Schumer are right to be trying to protect the interests of investors. At the same time, though, they have to recognize two hard truths.
First, it is still unclear whether U.S.-based auditing firms operating in China are passing PCOAB inspections. Not only should the PCOAB attend to that task first, it should make the results of those inspections public. Failing to do so makes US regulators look hypocritical.
Second, the long-term outcome of this effort is less likely going to be a major improvement in corporate transparency in China than to hasten the shift of Chinese equities out of the U.S. and into Chinese exchanges. While US bourses boast far greater liquidity than China, the Shanghai and Shenzhen exchanges have access to a large, relatively undemanding pool of capital hungry for hot new listings. PRC exchanges could easily absorb a steady, modest stream of Chinese companies de-listing in the US and listing (or conducting new offerings) in China.
Doty et al are to be commended for their efforts. Sadly, corporate transparency in China will only improve when the Chinese government demands it in order to protect Chinese investors and/or the global position of Chinese markets.
- Eight Questions the WSJ Could Have Asked KPMG China (siliconhutong.com)
- China ‘Basically Ready’ to Allow Foreign Firms to Sell Stock (businessweek.com)
- Update on the Chinese Reverse Merger Crisis (dgriffith401.wordpress.com)
- US and China Fail to Agree on Cross-Border Auditing Standards (businessinsider.com)
- Thinking Clearly About Chinese Companies Listed On US Stock Exchanges. Or, If A Tree Falls In A Sino-Forest…. (chinalawblog.com)
- The ‘shorts’ who popped a China bubble (business.financialpost.com)