SEC Puts Out Timely Reminder on Remedial Actions for U.S.-Listed Chinese Companies

SEC: Statement on the Vital Role of Audit Quality and Regulatory Access to Audit and Other Information Internationally—Discussion of Current Information Access Challenges with Respect to U.S.-listed Companies with Significant Operations in China
The inability to date to achieve this level of regulatory cooperation with Chinese authorities raises a number of investor protection and general oversight issues.

The U.S. stock markets have long been attractive to foreign companies because of their efficiency and liquidity as well as the potential benefits offered in the form of brand-name enhancement and increased visibility. Many China-based companies, and companies that have significant operations in China, have sought these benefits. The factors driving these benefits include the application of U.S. disclosure requirements as well as regulatory oversight and enforcement.[23]

However, the barriers to information access discussed above may adversely affect investors in the U.S. markets and the interests they own in companies that are China-based or have significant operations in China, including because they reduce the certainty provided by U.S. law and oversight. We note that this risk is present for a company and its investors even if the company’s financial statements are complete and accurate and the audit was appropriately conducted. For example, when faced with increased uncertainty about the reliability of financial reports, investors may “price protect” that risk by increasing the companies’ cost of capital.[24]

While a reduction in oversight, and a related increase in uncertainty, may have broad market confidence-related effects, constraints on oversight also raise company-specific risk. For example, information barriers that inhibit oversight may allow bad actors to more effectively hide fraud. In addition, as we know all too well from our experiences with Enron, WorldCom, Adelphia and others, fraud in one company, or just a few companies, can undermine confidence more broadly.[25]

We believe it also is important to recognize that PCAOB inspections and SEC regulatory activities not only help to improve audit quality for the inspected foreign auditors’ U.S. listed clients,[26] but also provide benefits that may spread to these auditors’ non-U.S.-listed foreign public clients.[27] Said another way, the PCAOB inspection process that focuses on audits of U.S.-listed companies may drive the subject audit firm to improve its work in respect of companies that are not U.S.-listed.

Finally, we note that, depending on various facts and circumstances, including company-specific considerations, if significant information barriers persist, remedial actions involving U.S.-listed companies may be necessary or appropriate. In the past, remedial measures have included, as examples, requiring affected companies to make additional disclosures and placing additional restrictions on new securities issuances.
And delisting...

The list of all companies, not only Chinese, is at PCAOB: Issuers that are Audit Clients of PCAOB-Registered Firms from Non-U.S. Jurisdictions where the PCAOB is Denied Access to Conduct Inspections

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