SEC Chair Jay Clayton, SEC Chief Accountant Wesley Bricker and Public Company Accounting and Oversight Board ("PCAOB") Chair William D. Duhnke III raised concerns about foreign markets that restrict access to information about U.S.-listed companies operating overseas.
In a joint statement, Mr. Clayton, Mr. Bricker, and Mr. Duhnke emphasized that information necessary for regulatory oversight of U.S.-listed companies with substantial overseas operations does not always "flow" to U.S. capital markets regulators. One of the biggest issues facing regulators and investors is the inability of the PCAOB to inspect the audit work papers of PCAOB-registered auditing firms in China with respect to their audit work of U.S.-listed companies.
The SEC and PCAOB noted that the "flow" of international capital investment creates challenges, particularly in regard to the SEC's efforts to protect transparency and accountability in financial reporting globally. It also pointed out that the SEC intends to continue addressing these challenges by engaging in communication with international market regulators and law enforcement authorities.
Mr. Clayton, Mr. Bricker and Mr. Duhnke highlighted that the SEC and PCAOB face particular challenges in overseeing financial reporting for U.S.-linked companies that have operations in China. The future goal, they said, is to achieve a level of cooperation with Chinese authorities that (i) respects Chinese and U.S. sovereignty and (ii) enables the SEC and PCAOB to have access to information necessary to conduct adequate corporate investigations and auditor inspections. The joint statement also warned that, if information barriers continue, there remains the possibility that "remedial actions involving U.S.-listed companies may be necessary or appropriate."
Commentary / Joseph V. Moreno
While the joint statement did not come out and say it explicitly, its focus was clearly to re-open the debate about access to audit information of such Chinese mega-corporations as Alibaba Group and Baidu Inc. These companies enjoy the benefits of being listed on U.S. stock exchanges, but avoid much of the regulatory scrutiny that U.S.-based companies and auditors receive due to restrictive Chinese state secrets laws. At a time when U.S.-China relations are being pulled to a breaking point due to trade tensions and the recent arrest of a Chinese corporate executive, this is yet another unsustainable issue for which a quick and simple resolution remains unlikely.
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