The US Senate overwhelmingly approved new legislation on Wednesday that could lead to Chinese companies such as Alibaba Group and Baidu possibly being delisted from U.S. stock exchanges amid increasingly tense relations between the world’s two largest economies.
The bill was approved by unanimous consent in the US Senate and would require companies to certify that they are not under the control of a foreign government. It would require that foreign companies listed on a US exchange be audited by the Public Company Accounting Oversight Board.
If a company can’t show that it is not under government control or the Public Company Accounting Oversight Board isn’t able to audit the company for three consecutive years, the company’s securities would be removed from US exchanges.
Corporate Finance Book: https://amzn.to/2WT5Jw7
Visit our website: http://www.onfinance.org
Follow Patrick on Twitter Here: https://twitter.com/PatrickEBoyle
The Public Company Accounting Oversight Board or PCAOB is a little-known agency, created by the Sarbanes–Oxley Act in 2002 to oversee the audits of public companies and other securities issuers. The Sarbanes-Oxley Act required that auditors of U.S. public companies be subject to external and independent oversight for the first time in history. Previously, the profession was self-regulated.
This all came about in response to the Enron accounting scandal in 2001 which brought down Arthur Andersen after it was found guilty of crimes in the firm’s auditing of Enron.
The Holding Foreign Companies Accountable Act, is not yet law. For this to become law, it has to be voted on by the House of Representatives and then sent to the President of the United States who can choose whether or not to sign the bill. If the President signs the bill, it becomes a law.
Why is this an issue all of a sudden?
There have been a number of scandals in the last short while which have raised questions about the state of Chinese accounting practices, and whether stock exchanges are doing enough to protect investors from fraud and scandal. The most notable story has been the fall of Luckin Coffee, which announced that it may have overstated sales by hundreds of millions of dollars. Nasdaq has since sent a notice to Luckin Coffee that it intends to delist the company’s ADR shares from the exchange.
Around the world the models of corporate governance differ according to the variety of capitalism in the countries in which firms are incorporated. The Anglo-American model emphasizes the interests of shareholders. The multi-stakeholder model associated with Continental Europe and Japan also recognizes the interests of workers, managers, suppliers, customers, and the community. Corporate governance is of great importance economically. It is the reason that investors have faith in the capital markets and are willing to invest their savings in projects and businesses that provide jobs, economic growth, and products to the marketplace.
I have a chapter in my Corporate Finance book, on corporate governance which goes through the various laws and listing requirements, particularly in the United States.
There has been a general trend towards better corporate governance around the world – a trend which started after the 1929 stock market crash. In recent years, a lot of Silicon Valley companies have bucked that trend.
Facebook went public a few years ago with a multiple share class structure. This enabled Founder shares to maintain 10 times the voting rights of common shareholders. Shortly after that Snap went public issuing only non-voting shares to the public.
Former president Donald Trump last year issued an order banning investments in companies that the Pentagon had put on a list of groups with suspected links to the People’s Liberation Army.
Companies can look around the world to find exchanges to list on, but no regulatory regime or exchange wants to be recognized as the place where companies with questionable corporate governance and accounting irregularities look to when raising capital.
Some political analysts are saying that investors should “expect swift passage” of the bill “likely before the end of the month” “From there, it will go to President Trump’s desk, where he will sign it into law, likely within the next few weeks.”
