(May 29): After passing unanimously in the US Senate on May 20, 2020, the Holding Foreign Companies Accountable Act is heading for the House of Representatives, and US President Donald Trump is expected to sign it into law. The law requires that all companies listed on US stock exchanges submit to audits reviewable by the US Public Company Accounting Oversight Board (PCAOB), and non-compliant firms can be delisted after three years. This has generated talk that all Chinese firms could disappear from US exchanges.

Some observers might question the wisdom of such legislation, on the grounds that it could hurt returns on US household savings, financial-sector profits, and the global competitiveness of US stock exchanges. While these are legitimate concerns, a US threat to delist Chinese firms could be worth the risk, leading not only to more credible disclosures, but also, perhaps surprisingly, to more listings by high-quality Chinese private-sector firms.

Truthful disclosure and severe punishment for non-compliance constitute the bedrock of sound capital-market governance. The US applies the same criteria to all firms that seek a listing on a US stock exchange, and oversight by the PCAOB is a key element of enforcing the rules. When a listed firm makes a questionable disclosure, the PCAOB reserves the right under the 2002 Sarbanes-Oxley Act to inspect the underlying accounting documents of its auditing firm. If deficiencies are found, the auditing firm must amend its report and take steps to improve its procedures and practices. This enhances investors’ confidence in the listed firms’ disclosures.

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