The SEC Caves on China An exemption for Chinese auditors puts U.S. markets at risk.
The Wall Street Journal
The Wall Street Journal
U.S. stock-market regulators say they promote transparency and fair play, but this month the Securities and Exchange Commission quietly carved out a China-size exception: When Chinese companies list on U.S. markets, basic auditing rules won’t apply.
Why?
Because China’s government doesn’t want them to, and Washington bent to Beijing’s pressure. The SEC has long sought access to the auditing records of Chinese companies suspected of fraud. Tens of billions of dollars in U.S. market value have disappeared in recent years as more than 170 U.S.-listed Chinese companies have faced scrutiny for embezzlement, theft, misrepresentation and other abuses.
China-based auditors have refused to comply with SEC subpoenas for their clients’ paperwork, citing Chinese laws that treat such corporate information as state secrets.
These laws, always vague and often harshly enforced, are a classic authoritarian tool for masking the political interference, graft and opacity endemic to China’s economy.
In 2012 the SEC filed charges against the Chinese affiliates of the Big Four audit firms, KPMG, PricewaterhouseCoopers, Ernst & Young and Deloitte.
“Only with access to work papers of foreign public accounting firms can the S.E.C. test the quality of the underlying audits and protect investors from the danger of accounting fraud,” enforcement chief Robert Khuzami said at the time.
Last year SEC Administrative Judge Cameron Elliot ruled that the auditors were “willfully violating” U.S. regulations by refusing to turn over client information.
China’s secrecy rules are no excuse, he wrote, because the auditors and their clients freely chose to list in the U.S. under SEC regulation: “To the extent the [firms] find themselves between a rock and a hard place, it is because they wanted to be there. A good faith effort to obey the law means a good faith effort to obey all law, not just the law one wishes to follow.”
He suspended the auditors from practicing before the SEC for six months, pending appeal to the SEC Commissioners.
Judge Elliot’s decision appeared to point the way toward a U.S.-Chinese diplomatic compromise, as both countries would feel some pain if the auditors’ suspension from the U.S. was affirmed.
Chinese companies would have to delist from U.S. exchanges and relist in less familiar and less sophisticated markets overseas.
Bankers and lawyers on Wall Street would lose some fees, and U.S. firms operating in China would have to adjust their own relationships with auditors and the SEC.
So officials had good reason to balance Chinese sensitivities over “secrecy” with U.S. concerns about accounting fraud.
But the result is a cave-in, not a compromise.
SEC Commissioners decided this month not to suspend the Chinese audit firms or penalize them beyond token fines of $500,000—less than an average partner’s salary.
In return, the firms agreed to follow certain procedures for conveying audit information to the SEC through Chinese state regulators.
Yet Chinese authorities aren’t even a party to the settlement, so they remain as free as ever to stymie future investigations.
The upshot is that investors in U.S. capital markets still lack basic protections against Chinese fraudsters.
And the financial stakes are rising.
Chinese firms now account for hundreds of billions of dollars of U.S. market value, led by e-commerce giant Alibaba , which last year raised $25 billion in an initial public offering.
If the SEC is unwilling to enforce a level playing field among auditors working around the world, it could at least do more to flag risks for the market.
On China’s stock exchanges in Shanghai and Shenzhen, domestic regulators have branded some stocks for “special treatment” if their earnings and accounting practices suggest particular risk.
The SEC could adopt similar labels for the stocks of any U.S.-listed companies—Chinese or otherwise—that are unwilling to share their audit records.
China’s official Xinhua news agency says the SEC decision proves that Chinese auditors are “too big to ban.”
That’s bad enough for U.S. capital markets.
The greater threat, which endangers far more than stock prices, is China’s rising confidence that it can play by its own rules.
Comments
Dudie Katani
He gives the Iranians a free ride on Nukes and time to finish developing their weapon, gives the Chinese a free ride on GAAP and finance and skewer the US economy with fake practices...not that they would ever do that, gives the illegal aliens a free ride to amnesty, refuses to call the (shhhhhhhh.....Islamic Jihadists ) Islamic terrorists and jihadists.. because we know they are not, (right!), refusal to support Ukraine , refusal to stand up to Rootin Tootin Pootin? and has insulted our long standing allies to boot. I am really wondering if Giuliani's claim about Obama and too John McCain's the Sen. (R) from Arizona are really true. Rudolf may have been crude in his delivery but correct in essence....It is evident more and more that this president is truly disconnected from the American society and lives in his own made up world (wherever that is). We need to get rid of the troika, Obama-Biden-Kerry ( not with republicans) and take back our position of promoting freedom.
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Daniel Palmer
These days I barely trust an audit of a US based company so anyone stupid enough to trust the financial statements of a Chinese company deserves to lose their investment.
The market is more than capable of protecting itself here, if audits can't be trusted, don't invest, it is really not that complicated.
John Segal
It is time to call the bluff. Either delist them or tag everyone which uses a Chinese auditor with a big flag which means there is no means of detecting any fraud which may be present in their public financial statements.
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