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Final GMT 1.1

How will Chinese companies react to HFCAA?

I published a report that I coauthored with Ray Tang Hou of the UVA law school  on the Holding Foreign Companies Accountable Act with GMT Research.  GMT is a Hong Kong based research firm that focuses on accounting analysis.  GMT has generously allowed me to republish the report here

The report was published before the comments by China reported on this blog and the introduction of the bill as an amendment to the defense bill. 





Passing the PCAOB bill

The John Kennedy (R:LA) bill to kick Chinese companies off of US stock exchanges if their auditors are not inspected by the PCAOB passed the senate unanimously in May but has gone nowhere in the house.

Now the bill has been introduced as an amendment to the National Defense Authorization Act. A common legislative technique binds proposed legislation to “must pass” legislation in order to get it enacted.  

“I don't want to start a cold war with China,” said Kennedy of the effort, but he noted that things like the ongoing Luckin Coffee (LKscandal are a “fiasco.” He said an audit would have made sure companies like Luckin “are not lying about their products and therefore defrauding investors.”

What Kennedy gets wrong is that PCAOB inspections are unlikely to stop frauds like Luckin.  

Luckin executives admitted to booking fake sales. Luckin's auditor Ernst & Young claimed to have found the fraud – a claim that appears to violate accounting ethics rules to keep client’s information confidential. If EY’s claim is accurate, the fraud was attempted in 2019 and did not extend to the financial statements for 2018 that were used in the IPO. So, according to EY’s telling, the audit worked, the fraud was exposed and EY is the hero not the goat. Ethics be damned.

China blinks on PCAOB

Caixin has reported($$ paywall) some amazing comments from CSRC chairman Yi Huiman. Yi reportedly said that: “As long as the U.S. side is truly willing to solve the problem, we can definitely find a way for China and the U.S to cooperate on audit regulation”  HT to Donald Clarke for tipping me off on this. 

Yi further added: Chinese law stipulates that exchanging information, such as providing audit working papers for overseas regulators, should be conducted through regulatory cooperation and comply with security and confidentiality regulations. Carrying out joint inspections is a common practice of international cooperation on this issue.

I doubt Yi is unaware of the fact that China has blocked inspections since the passage of Sarbanes Oxley in the early 2000s. The U.S. has certainly shown its willingness to solve the problem, even agreeing to a joint trial inspection that was called off when Chinese regulators would not allow the PCAOB to see documents or ask questions.  

Yi is correct that joint inspections are the common practice of international cooperation. I believe this is the first time Chinese authorities have sanctioned that approach. Formerly they argued for regulator equivalency, where US regulators would rely on Chinese regulators to examine auditors.  The PCAOB has long rejected that approach, although it was adopted by the EU. 

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