What’s Driving the US-China Spat Over Audits and Delisting
About 200 Chinese companies whose shares trade in the US, including JD.com Inc. and Baidu Inc., face delisting because American regulators aren’t able to verify their financial audits. While China and the US continue to negotiate access to audits, there are signs that Chinese companies are preparing for the eventuality of expulsion from the New York Stock Exchange and the Nasdaq. Already, Alibaba Group Holding Ltd. said it will seek a primary listing in Hong Kong, a move that could be the precursor to its eventual departure.
The 2002 Sarbanes-Oxley Act, enacted in the wake of the Enron Corp. accounting scandal, requires that all publicly traded companies make their audit work papers available for inspection by the US Public Company Accounting Oversight Board, or PCAOB. According to the US Securities and Exchange Commission, more than 50 jurisdictions work with the board to allow the reviews. Only two don’t: China and Hong Kong. The long-simmering issue grew hotter when Chinese chain Luckin Coffee Inc., which was listed on Nasdaq, was found to have intentionally fabricated a chunk of its 2019 revenue. The following year, in a rare bipartisan move, Congress passed the Holding Foreign Companies Accountable Act, or HFCAA, which says companies can’t trade on US exchanges if their audits aren’t made available for inspection for three consecutive years.