Some big-name Chinese stocks are facing the prospect of getting booted from the New York Stock Exchange and Nasdaq if they refuse to let US regulators see their financial audits. A revived effort by the US Securities and Exchange Commission (SEC) to gain access to audits of overseas companies that began under former President Donald Trump is continuing under President Joe Biden. Alibaba Group Holding and Baidu are among 200-plus companies in the regulator’s crosshairs, and although the process has years to play out, investors have started to pay attention.
1. Why does the US want access to audits?
The 2002 Sarbanes-Oxley Act, enacted in the wake of the Enron Corp. accounting scandal, required that all public companies have their audits inspected by the US Public Company Accounting Oversight Board. In the ensuing two decades of negotiations, China has refused to grant access. The long-simmering account- ing issue morphed into a political one as tensions between Washington and Beijing ratcheted up during the Trump administration. The Chinese chain Luckin Coffee, 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 moved to force US-listed companies based in China and Hong Kong to finally allow inspections.