It is most likely that you have heard about the trade war with China. However, there could be a separate potential ‘financial war’ brewing.
The Securities and Exchange Commission wants people to know more about what is happening with companies in China that are listed in the United States. Additionally, regulators want people to know that they are having a tough time finding out what exactly is going on regarding this.
Today, the Sec will hold a roundtable discussion on emerging markets. The discussion is really about the next phase to get regulatory authorities of China to be more transparent concerning what is happening inside Chinese companies on United States exchanges list.
This has been a problem for years. It has gotten more severe traction recently, however. This is because of the escalation of trade disputes between China and the United States.
Hundreds of Chinese companies went public in the United States via reverse mergers more than a decade ago. Here, they merged with public but mostly dormant United States companies. Nevertheless, many of them turned out to be frauds. The movie “The China Hustle” was made about this whole affair.
There is one weak point in their analysis, and this is the auditing procedures. The Sarbanes-Oxley Act of 2002 made way for the Public Company Accounting Oversight Board. It required that every foreign and domestic accounting firm that issues audit reports for companies report to the SEC register with the board. The board must periodically inspect registered firm audits of United States public companies. This includes those audits done by foreign firms.
Situation of China
The PCAOB negotiated agreements with foreign counterparts, which allowed them to perform audit inspections, over time. Nevertheless, they have been stymied with their regulatory counterparts in China. Their counterparts claim that audit records are state secrets.
Brendan Ahern works at Krane shares, where he is a chief investment officer. Ahern runs several China exchange-traded funds. He said that the Chinese government’s ownership of many companies is part of the problem. Across the 200 listed companies of China, there are a few state-owned enterprises. Moreover, for the Chinese, revealing financial information about them is particularly sensitive. Ahern believes that China must comply with the United States’ regulatory requirements.
PCAOB Chairman, William Duhnke III, and Sec Chair, Jay Clayton, went public with their concerns last year. They now reiterated their frustrations in the February 19 statement. They originally noted that the board continues to be prevented from inspecting any audit work. This was along with the practices of PCAOB-registered audit firms in China on a comparable basis to other non-United States jurisdictions.
That roundtable discussion is a part of the continuing effort to build a case against China’s recalcitrance. This is according to Roger Silvers.
Roger Silvers works at the University of Utah. He is an accounting professor there. Previously, Silvers worked for the SEC, and he submitted some comments to the roundtable.
Silvers said that in blocking requests for access to its audit records, China has been very obstructionist. Overall, there is a growing sense of frustration with China. Now, with the Covid-19 outbreak and trade wars, there is an increasing appetite to pick a fight with the country.
- Trading Instrument