Abstract
Key points: -Accurate financial statements are critical to investors in making informed decisions and vital to the overall well-being of the US capital market. -For cross-listed and multi-jurisdictional businesses, the current regulatory frameworks fail to create governance equivalency between foreign and US domestic issuers that are listed in the USA. -The US Holding Foreign Companies Accountable Act (HFCAA) seeks to level the playing field. -Companies that use accounting firms which cannot be inspected by the Public Company Accounting Oversight Board for three consecutive years risk being de-listed from US securities exchanges and also becoming subject to a prohibition in over-the-counter trading in their stock. -Behind the statutory response in HFCAA are intertwined tensions between stakeholders and sovereigns. -The key to addressing the current imbalances will be to strike a balance between maintaining the US stock markets’ open to high-quality foreign issuers and enabling US investors to have access to reliable financial information. -It remains uncertain whether the HFCAA will reshape the governance landscape geoeconomically.
Highlights
The bedrock of the U.S stock market system is high quality and reliable financial statements.[1]
U.S regulators, like Public Company Accounting Oversight Board (PCAOB), are not allowed to inspect the work and practices of audit firms based in China, making it harder to discern whether the financial statements reflect a U.S.-Listed Chinese Companies (ULCCs)'s true financial position
ULCCs are not subject to the same regulatory oversight as other companies that trade on U.S exchanges, resulting in a situation where there is a double-standard in regulation
Summary
The bedrock of the U.S stock market system is high quality and reliable financial statements.[1]. 56 VIEs are mostly used for legitimate business purposes, inadequate governance in this area allows some companies to manipulate their financial statements to hide losses and fabricate earnings.[7] U.S regulators, like PCAOB, are not allowed to inspect the work and practices of audit firms based in China, making it harder to discern whether the financial statements reflect a ULCC's true financial position. Given this institutional void, ULCCs are not subject to the same regulatory oversight as other companies that trade on U.S exchanges, resulting in a situation where there is a double-standard in regulation. A concluding remark is provided, highlighting that multipronged approaches will help to mitigate the problem in the current confronting environment
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