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Kennedy Bill and MNCs

This post is more in the weeds about the Kennedy bill. Although I believe the intent of this bill is to force China to allow PCAOB inspections of Chinese auditors, the way it gets there may have unintended consequences.

The bill essentially bans trading in companies whose auditors are not able to be inspected by the PCAOB. The bill is limited to covered issuers (essentially any public company) that are audited by an auditor with a branch or office in a foreign jurisdiction that does not allow inspections.

Those definitions obviously bring most US listed Chinese companies under the jurisdiction of the Kennedy Bill. They are public companies and are mostly audited by the Chinese member firms of the Big Four accounting firms.

But what about multinationals like IBM? IBM is audited by the US firm of PwC which uses PwC Zhong Tian CPAs, its China firm, to audit China operations. PwC Zhong Tian is a Chinese limited liability partnership, not an office or branch of the US firm. The Big Four accounting firms are structured more like a franchise operation than an MNC. Local operations tend to be owned by local partners. On its face, I don’t think that Big Four firms in China constitute a branch or office of the US firm. This is not an insignificant point. The PCAOB has identified 207 multinationals where it can inspect some, but not all of the audit.

Ban on Chinese companies passes senate

Readers will have recognized that I have reduced my blog postings significantly in the last year. I was trying to ease towards retirement but activity has increased so much I feel compelled to write from quarantine. I was in California at Chinese New Year and got stuck.

This week the Senate passed by unanimous consent Kennedy’s bill titled Holding Foreign Companies Accountable Act. Kennedy’s bill was one of three bills that had been introduced on the topic. I am unclear why Kennedy’s bill was chosen over Marco Rubio’s Equitable Act, but the Kennedy bill is shorter and had more co-sponsors including Florida’s other senator.

The bill now has to pass the house and be signed by the President. I don’t think that is certain, given that I expect considerable lobbying pressure to kill it from US institutions that would be adversely affected.

If the bill is enacted it does two things:

1) Of minor significance is a requirement for companies to disclose party affiliations including whether a foreign government has control, and whether any board members are CCP members and whether the articles of incorporation contain any language from the party. No penalty is provided for failure to do this.

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