Senate May Vote on Oversight of Chinese Issuers

The U.S. Senate could be nearing a vote on a bipartisan measure that would require Chinese companies listed on U.S. stock exchanges to comply with U.S. auditing and reporting requirements.

Chinese companies that trade their shares in the U.S. are currently exempt from being audited by accrediting U.S. auditing firms and having those audits reviewed by the Public Company Accounting Oversight Board.

Under the Holding Foreign Companies Accountable Act, the Securities and Exchange Commission would be authorized to identify any issuer whose audit reports are not available for PCAOB inspection and, if an issuer has three consecutive years of not being inspected, bar it from being traded on a U.S. exchange.

Issuers whose audits are not available for inspection would have to establish they are not owned or controlled by a foreign government.

“This is important to protect the integrity of U.S. exchanges and U.S. investors,” Sen. Chris Van Hollen (D-Md.), co-sponsor of the bill with Sen. John Kennedy (R-La.), said last year.

The exemption for Chinese companies dates back to a 2013 agreement with the SEC. The Chinese government maintains that allowing a foreign agency to audit Chinese companies on Chinese soil is an offense against Chinese government sovereignty and that the reports constitute a Chinese government state secret.

But Henrietta Treyz, director of economic policy at Veda Partners, believes that with U.S.-China relations deteriorating in an election year, the Kennedy-Van Hollen bill will pass if it comes up for a Senate vote.

“It has bipartisan support … and both Democrats and Republicans are eager to paint a clear picture that they are tough on China,” she wrote in a client note.

As of February 2019, there were 156 Chinese companies listed on U.S. exchanges with a total market capitalization of $1.2 trillion, according to the U.S.-China Economic and Security Review Commission. They include Alibaba Group, Baidu, and JD.com.

A similar measure to end the Chinese oversight exemption was introduced in the House and Senate last year but did not make it out of committee.

audit inspection, audit reports, China, Holding Foreign Companies Accountable Act, U.S. Securities and Exchange Commission, U.S. Senate