Biden Administration Forces Chinese Companies to Open Their Books

 

The Biden Administration's Push for Transparency: Forcing Chinese Companies to Open Their Books, and be held accountable for their practices in U.S. markets.

Since the Enron and WorldCom scandals, the U.S. has allowed companies to publicly list their stocks only if they agree to let federal watchdogs review their auditors’ work. Yet for years, Beijing authorities, citing national security concerns, refused to allow U.S. inspectors to examine the books of China- and Hong Kong-based companies. Biden’s regulators finally forced their hand with the help of Congress and even former President Donald Trump.

In a significant move towards increased transparency and market accountability, the Biden administration has intensified efforts to compel Chinese companies listed on U.S. stock exchanges to open their books to American regulators. This initiative, rooted in longstanding concerns about financial transparency and national security, marks a pivotal moment in the economic relationship between the world's two largest economies.

The roots of this initiative can be traced back to the Sarbanes-Oxley Act of 2002, enacted in response to major corporate and accounting scandals, including those affecting Enron and WorldCom. The act established stringent auditing and financial regulations for companies listed on U.S. exchanges. However, many Chinese companies have historically resisted these requirements, citing national security concerns and differences in regulatory standards.

The issue gained prominence under the Trump administration, which enacted the Holding Foreign Companies Accountable Act (HFCAA) in December 2020. The HFCAA mandates that foreign companies listed on U.S. exchanges comply with U.S. Public Company Accounting Oversight Board (PCAOB) audits. If they fail to do so for three consecutive years, they risk being delisted. The Biden administration has continued and intensified these efforts, emphasizing the need for transparency and investor protection.

Washington negotiators secured a landmark deal in August 2022 that would give American inspectors at the Public Company Accounting Oversight Board, the top U.S. accounting watchdog, unprecedented access to the audits of Chinese and Hong Kong-based firms trading on the New York Stock Exchange and Nasdaq. The deal was reached after passage of a 2020 bill, which Trump signed into law in his administration’s waning days, that would have given the noncompliant companies the boot if they didn’t acquiesce.

China has held up its end of the deal. Four months after the agreement, the PCAOB confirmed it was able to fully review the Chinese companies’ audits. The inspections eventually resulted in $7.9 million in fines and sanctions against three China-based firms and four individuals. SEC Chair Gary Gensler, whose agency oversees the PCAOB, has touted the deal as a success that has better protected American investors.

Whether China’s cooperation continues is still a concern for U.S. regulators — and will likely linger no matter who is president come 2025. Trump’s first time in office paved the way for the eventual deal struck by Biden’s regulators, suggesting that the SEC and PCAOB will probably keep the pressure on Beijing.

The Biden administration's approach to Chinese companies and their compliance with U.S. auditing standards has been clear and resolute. SEC Chair Gary Gensler has repeatedly emphasized that compliance with U.S. regulations is non-negotiable for all companies listed on American exchanges, regardless of their country of origin. This stance aims to protect American investors from the risks associated with opaque financial practices and potential fraud.

In a statement from July 2021, Gensler highlighted the importance of audit inspections, stating, “The Sarbanes-Oxley Act requires that the PCAOB be able to inspect the audit work papers of any registered public accounting firm globally. We simply can’t compromise on these principles.” This sentiment reflects the administration's commitment to ensuring that all companies adhere to the same rigorous standards.

For Chinese companies, the Biden administration's demands present a significant challenge. Historically, Chinese regulators have restricted access to audit papers, citing state secrets and national security concerns. This has created a standoff between the two nations' regulatory bodies.

However, the stakes are high for Chinese companies listed in the U.S. The potential consequences of non-compliance include delisting from U.S. exchanges, which could significantly impact their access to capital markets and investor confidence. This situation has led some Chinese firms to consider dual listings in Hong Kong or other markets as a hedge against potential U.S. delistings .

The push for greater transparency is not occurring in a vacuum. It is part of a broader strategy by the Biden administration to address various economic and security concerns related to China. These concerns include intellectual property theft, cybersecurity threats, and unfair trade practices. By enforcing stringent audit requirements, the administration aims to mitigate some of these risks and level the playing field for American companies and investors.

Moreover, this move aligns with the global trend towards increased corporate transparency and accountability. In an interconnected world, the financial stability of one market can have far-reaching implications for others. Ensuring that all companies adhere to high standards of transparency is crucial for maintaining investor confidence and market stability.

China's response to these developments has been measured but firm. Chinese regulators have expressed a willingness to cooperate with U.S. counterparts, but they have also emphasized the need to respect China's sovereignty and regulatory framework. In April 2022, the China Securities Regulatory Commission (CSRC) announced that it would revise confidentiality rules for offshore listings, potentially paving the way for greater cooperation with the PCAOB.

Despite these overtures, significant challenges remain. The fundamental differences in regulatory philosophies and the geopolitical tensions between the two countries complicate efforts to reach a comprehensive agreement. Nevertheless, ongoing negotiations and dialogue suggest that both sides are aware of the high stakes and the need for a workable solution.

For investors, the Biden administration's push for transparency is a welcome development. It promises to enhance the reliability of financial information and reduce the risks associated with investing in foreign companies. By holding all companies to the same high standards, the administration aims to protect investors from potential fraud and financial mismanagement.

However, there are also risks associated with this approach. The potential delisting of Chinese companies could lead to significant market volatility and impact the portfolios of investors who hold these stocks. As such, investors must stay informed about regulatory developments and adjust their strategies accordingly.

The Biden administration's efforts to force Chinese companies to open their books represent a crucial step towards greater market transparency and investor protection. While significant challenges remain, the administration's unwavering commitment to rigorous auditing standards underscores the importance of accountability in global markets. As negotiations continue and regulatory frameworks evolve, the ultimate outcome will likely have profound implications for the economic relationship between the U.S. and China and for the global financial landscape.

By fostering a more transparent and accountable market environment, the Biden administration aims to protect investors and strengthen the integrity of the U.S. financial system. As this initiative unfolds, it will be crucial to monitor its impact on both the market dynamics and the broader geopolitical landscape.

 

References

30 Things Joe Biden Did as President You Might Have Missed. (2024). Retrieved June 3, 2024, https://www.politico.com/news/magazine/2024/02/02/joe-biden-30-policy-things-you-might-have-missed-00139046

Holding Foreign Companies Accountable Act. (2020). Retrieved June 10, 2024 from [SEC.gov] https://www.sec.gov/hfcaa

Sarbanes-Oxley Act Overview. (2002). U.S. Securities and Exchange Commission. Retrieved June 10, 2024 from [SEC.gov] https://www.sec.gov/about/laws/soa2002.pdf