Congress passes a Bill that forces Chinese stocks to meet US accounting standards
The U.S. House of Representatives unanimously passed legislation on Wednesday that would kick Chinese companies off U.S. stock exchanges if they do not fully comply with the U.S. auditing rules.
The Holding Foreign Companies Accountable Act, which was first introduced in May of 2019, passed the Senate by unanimous vote in May. Next, it will go to President Donald Trump’s desk, where it is expected to be signed into law.
Though the legislation applies to all countries, the bill’s sponsors intended it to target Chinese companies listed in the United States.
Currently, around 200 Chinese companies trade on US Exchanges with Alibaba (BABA), JD.com (JD), Nio Inc (NIO), Sina Corp (SINA), Baidu Inc (BIDU), Vipshop (VIPS), Futu Holdings (FUTU), and Pinduoduo (PDD) being some of the most well-known.
Under the bill, China stocks would face delisting within three years unless their auditors come under the supervision of the Public Company Accounting Oversight Board.
Accounting fraud by Chinese companies has become common enough on US exchanges that just being a Chinese company often raises red flags, making them the target of speculation and scrutiny by US investors. This is largely due to Chinese authorities’ reluctance to let overseas regulators inspect local accounting firms, citing national security concerns.
Earlier this year, Luckin Coffee (LKNCY) fired both its CEO and COO amid an ongoing investigation into a $310 million sales fraud. The company was subsequently delisted from the Nasdaq.
Recently, Kandi Technologies (KNDI) became the target of a report by Hindenburg Research alleging accounting fraud, including self-dealing and fake sales. The KNDI stock price has fallen about 50% since the report went public.
China’s hardline approach making it illegal for Chinese auditors to submit to scrutiny from an overseas regulator puts nearly $2 trillion in capital at risk of being wiped off the American exchanges.
However, Congress doesn’t necessarily have the last word. Even if it passes into law, the Treasury controls implementing regulations for whatever Congress passes.
In August, a policy group led by Treasury Secretary Steven Mnuchin offered a more lenient approach. To get around Beijing’s refusal to let the PCAOB review the work of Chinese auditors, Mnuchin would permit Chinese firms to engage a U.S. accounting firm to do the job.
Critics of Mnuchin’s approach argue that U.S. accounting firms couldn’t vouch for the accuracy of the secondhand data they would get to review.
In the coming weeks, Securities and Exchange Commission Chair Jay Clayton may bring Mnuchin’s more flexible approach up for a commission vote.
But the big question is what Janet Yellen, the incoming Treasury secretary, and President-elect Joe Biden think.
For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit www.securitieslawyer101.com. This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute legal advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.
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