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Bills Aim to Expose Audits of U.S.-Traded Chinese Companies

June 6, 2019, 5:08 PM

A bipartisan group of lawmakers have introduced legislation in the House and Senate to block Chinese companies from being publicly traded in the U.S. if they don’t turn over their financial audit work papers to the Public Company Accounting Oversight Board.

“Any Chinese company who wishes to be listed on U.S. stock exchanges, or access U.S. capital, should be required to comply with U.S. laws on financial transparency,” Rep. Mike Conaway (R-Texas), who cosponsored the bill in the House, said in a June 5 statement. He sponsored similar legislation in 2018 that expired with the start of this Congress.

The bill would require additional disclosures of companies whose audits the PCAOB can’t inspect, including the names of any Chinese Communist Party officials who serve on these companies’ boards of directors.

The companies must also disclose the percentage of shares held by the government. The bill would bar initial securities offerings for foreign-based companies that don’t comply with the PCAOB inspection process.

It would also delist companies if they violate U.S. accounting regulations for three consecutive years starting in 2025.

China treats corporate accounting records as state secrets, barring PCAOB inspectors from accessing them. According to the Securities and Exchange Commission, 213 U.S. registered companies have auditors based in mainland China or Hong Kong.

Reps. Tim Ryan (D-Ohio) and Mike Gallagher (R-Wis.) also signed on to the bill, along with Sens. Marco Rubio (R-Fla.), Tom Cotton (R-Ark.), Kirsten Gillibrand (D-N.Y), and Bob Menendez (D-N.J.).

The legislation comes almost six months after the SEC and PCAOB, the U.S. audit regulator, warned investors that the financial records of these companies may not be reliable. They two regulators said that negotiations to access the audit records of Chinese companies had stalled.

The PCAOB inspects foreign audit firms that perform work related to the financial statements of companies registered in the U.S.

To contact the reporter on this story: Amanda Iacone in Washington at aiacone@bloombergtax.com

To contact the editors responsible for this story: Jeff Harrington at jharrington@bloombergtax.com; Steven Marcy at smarcy@bloombergtax.com