U.S. launches accounting regulation rules, Chinese stocks plunge en masse

The PCAOB launched a request for comment on May 13 on how to determine the determination of “ineffective accounting supervision” in the Foreign Company Accountability Act. After the news came out, Chinese stocks plunged. The picture shows a view inside the New York Stock Exchange.

On May 13, the U.S. Public Company Accounting Oversight Board (PCAOB) launched a comment period on how to determine the determination of “ineffective accounting supervision” under the Foreign Company Accountability Act. After the news came out, Chinese stocks plunged.

According to Caixin.com on May 14, the Foreign Company Accountability Act was officially signed into U.S. federal law on Dec. 18, 2020, and the SEC and PCAOB are required to develop rules to implement the Act.

The Act mainly adds provisions for listed companies in the U.S. to meet accounting regulatory requirements, and failure to do so will result in a ban on trading in all U.S. securities markets (including the over-the-counter market). According to the report, the Act is clearly intended to target Chinese stocks, and specifically adds information disclosure requirements: whether the company is owned or controlled by a foreign government, whether the names of Chinese Communist Party officials on the board of directors are disclosed, and whether the Chinese Communist Party constitution is included in the company’s articles of incorporation.

On May 5, 2021, the SEC’s Interim Disclosure Requirements under the Act became effective, but the requirements for filings and disclosures therein will not take practical effect until the PCAOB completes the determinations of the relevant auditors and companies.

The PCAOB’s rules, which were put out for comment on the 13th, are designed to determine “whether accounting regulation cannot be effectively implemented”. According to the report, the issuance of the rules for comment means that the regulatory policy mainly for Chinese stocks has been drafted and will enter the substantive implementation stage.

PCAOB Chairman William D. Duhnke said that the three requirements for determining the effectiveness of accounting supervision in this request for comment are not new, but “represent the basic principles of all cooperative arrangements the Board has with foreign authorities ” and these principles articulate the foundational conditions needed for the PCAOB to be able to effectively perform inspections and investigations.

For a long time, the PCAOB has not allowed corporate financial filings to leave the mainland because of obstacles placed by the Chinese Communist Party. According to reports, the PCAOB does not have direct access to the audit workpapers of Chinese stocks and cannot enter and inspect accounting firms in mainland China and Hong Kong that are registered with the Commission, and these barriers have resulted in the SEC not being able to enforce the same regulatory standards for financial audits of Chinese stocks as it does for other public companies in the United States.

Because U.S. regulators do not have access to the audit workpapers of Chinese stocks, Chinese stocks have been repeatedly found to be financially fraudulent, while the financial data of Chinese stocks have also been repeatedly questioned by U.S. financial institutions. The biggest impact recently was the delisting of RuiXing Coffee due to financial fraud, while Chinese stocks such as Whoology have been repeatedly shorted by U.S. institutions due to doubts about the authenticity of their data.

The report said that since the above new regulation is only for the fiscal year of listed companies ending after December 31, 2020, and generally speaking, the reports of listed companies for fiscal year 2021 are issued in 2022, i.e., the situation of not being able to meet the regulatory requirements for three consecutive years and being prohibited from trading will occur in 2024 at the earliest.

After the news of the “inability to effectively implement accounting supervision” rules for consultation, the 13th closing, Chinese stocks fell collectively, including the New Oriental fell 14.42%, NetEase Youdao fell 10.55%, Predo fell 7.11%, Beili Beili fell 6.83%, Alibaba fell 6.28%.