On March 14, 2011, the PCAOB released a research note on reverse mergers in China. The purpose of the note was to provide context for the concerns that were raised in Audit Practice Alert No. 6. This alert indicated that some U.S. registered accounting firms may not be conducting audits of companies with operations outside of the U.S. in accordance with PCAOB standards.
The note was prepared by the PCAOB’s Office of Research and Analysis (ORA) and identified 159 companies from China that came to market in the U.S. through reverse mergers. It found that U.S. based accounting firms audited 74% of the reverse mergers, while China based firms (including Hong Kong) audited 24%. The research note makes no policy recommendations.
The note is focused on the reverse merger market, and accordingly does not provide any information about the much larger (by market capitalization) market of companies that have come to market through traditional IPOs and which are typically listed on NASDAQ or the NYSE. It also limits the data to companies that came to market between January 1, 2007 and March 31, 2010.
These limitations make the report of little value. It has been widely reported that over 350 Chinese companies have come to market through reverse mergers, and there are over 175 Chinese companies listed on NASDAQ and the NYSE. Most of the reverse merger companies trade on the OTCBB. It is very difficult to compile a complete list of Chinese companies listed in the U.S., because most of these companies are actually incorporated in an offshore jurisdiction such as the Cayman Islands, The British Virgin Islands or the United States. For my work I use data from stock exchanges, law firms, accounting firms, investment banks and Audit Analytics to compile what I think is a complete list. An interesting list of the Top 25 auditors of U.S. listings by number of listings that was recently published by a small U.S. CPA firm indicates that the Top 25 auditors audit 269 Chinese companies. The number of listings is not a very meaningful measure of market share, since many of the reverse mergers are small audit engagements.
The good news is that the PCAOB is keeping its focus on the China market. While the reverse merger market deserves attention, the PCAOB should not overlook the much larger market of Chinese companies listed on NASDAQ and the NYSE.