Congress Punts on China Stocks
A vague bill leaves accounting details to regulators and lobbyists.
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The decline of Congress is a growing problem in U.S. governance, not least the degree to which it writes vague legislation that lets administrative agencies determine the actual law. An egregious example is a bill President Trump is expected to sign soon that would banish Chinese companies from U.S. stock exchanges if they don’t open their external audits to federal regulators.
The 2002 Sarbanes-Oxley Act requires auditors of U.S. publicly listed companies to be registered and regularly reviewed by the Public Company Accounting Oversight Board (PCAOB). This requirement is intended to ensure auditors perform due diligence, though there’s little evidence it has improved audit quality or prevented fraud.
Beijing, however, has cited national security and state-secret laws to block the PCAOB from reviewing auditors, including subsidiaries of the big four U.S. firms, located in mainland China and Hong Kong. The PCAOB has identified 262 non-U.S. companies whose audit work it can’t inspect. Most are based in China, though some are in Belgium and France.
Enter Congress, which unanimously passed legislation that would kick companies off U.S. exchanges in three years if their auditors don’t let the PCAOB review their books. Sponsors Sen. John Kennedy (R., La.) and Rep. Brad Sherman (D., Calif.) say Chinese companies should have to play by U.S. rules to benefit from our rich and liquid capital markets.
Fair enough, though the bill also advances Beijing’s objective of drawing foreign investors to its exchanges in Hong Kong and Shanghai. U.S. investors will hold and trade shares in Chinese companies like Alibaba regardless of where they are listed. Americans receive more protections when the companies are listed on U.S. exchanges where they are subject to U.S. securities laws.
The blunt legislation could also sweep in 200 some U.S. multinational companies including Mattel and Wynn Resorts that rely on work performed by mainland Chinese and Hong Kong-based firms for a portion of their audits. After the bill passed the Senate in May, Mr. Sherman said he expected the House to amend the legislation to exempt U.S. companies.
Nope. The House couldn’t even find the time this summer to hold a hearing before whisking the bill through this month. That leaves hundreds of U.S. multinationals in limbo. But never fear, Messrs. Sherman and Kennedy entered a statement into the legislative record to guide the act’s interpretation by regulators.
The Securities and Exchange Commission should not delist companies as long as no more “than one-third of the company’s total audit is performed by a firm beyond the reach of the PCAOB inspection,” they explained. One-third of revenues? Assets? Some other metric? They also left that up to the SEC.
So now regulators will divine Congress’s unwritten intent amid frantic corporate lobbying for dispensations. This dereliction of legislative authority is why the administrative state has grown so vast, and Republicans deserve as much blame as Democrats.
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