The Securities and Exchange Commission adopted amendments on Thursday towards requiring that listed companies be subject to inspection and audit by the Public Company Accounting Oversight Board (PCAOB), a non-profit corporation established by Congress to oversee audits of public companies.
“We have a basic bargain in our securities regime, which came out of Congress on a bipartisan basis under the Sarbanes-Oxley Act of 2002. If you want to issue public securities in the U.S., the firms that audit your books have to be subject to inspection by the PCAOB,” said SEC Chair Gary Gensler. ” The Commission and the PCAOB will continue to work together to ensure that the auditors of foreign companies accessing U.S. capital markets play by our rules. We hope foreign governments will, working with the PCAOB, take action to make that possible.”
Currently there are two jurisdictions in which the PCAOB are unable to audit, China and Hong Kong, despite a 2013 memorandum of understanding between the PCAOB and the Chinese government. The amendments require foreign issuers of securities to prove they are not owned or controlled by a governmental entity, in the case that they are audited by their domestic accounting firms, as well as certain additional disclosures in their annual reports.
“This lack of compliance with international audit inspections calls into question the reliability of the corporate financial statements guiding valuation and investment,” noted the US-China Economic and Security review Commission, in a May 2021 report. “The case of Luckin Coffee illustrates the risks. In presenting information to support its initial public offering, Luckin manipulated critical revenue, operations and customer traffic data. During its IPO, shares traded at $17 raising $561 million in capital. Luckin’s peak market capitalization was $12 billion, with shares trading at just over $50. Within weeks of the disclosure of falsified information, the stock collapsed ultimately leading to losses for investors and its delisting from NASDAQ.”
According to the US-China Economic and Security review Commission as of May 5, 2021 there were 248 Chinese companies listed on the NYSE, NASDAQ and NYSE American, the three largest US exchanges, with a total market capitalization of $2.1 trillion.
By Feike de Jong