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U.S.-listed PRC companies: still playing pin the tail on the donkey

Re possible delisting of PRC-headquartered co's from US exchanges, this is a governance issue that has been brewing for over a decade.

Whether there is a fundamental weakness or risk associated investing in PRC companies listed in US has been, and remains, a vital question. The U.S. public securities system is founded on the principal of disclosure: as long as issuers make full & fair disclosure of their businesses' risks, investors free to make investment decisions. This assumes a company's financial statements contained in its periodic reports in fact accurate. After the Enron debacle revealed weaknesses in disclosure system, the U.S. securities laws were overhauled. The Sarbannes-Oxley Act established the U.S. Public Company Accounting Oversight Board, which holds responsibility for regulating auditors of public companies listed on U.S. exchanges.

PCAOB rules require such audit firms register with it & be subject to periodic investigation whether they are complying w/ U.S. law & professional accounting standards in work on behalf of U.S.-listed companies. As of '10, 59 PRC CPA firms were registered with the PCAOB. However, no PCAOB inspections had been conducted of them because the China Securities Regulatory Commission (PRC's SEC) objected to such inspections as an infringement of its sovereignty.

In the U.S. system, auditors provide a major influence in refining & improving corporate disclosure. A serious question regarding PRC companies is whether management is fully committed to abiding by U.S. principles of accurate disclosure & whether outside auditors in the PRC have a comparable commitment to promote accurate financial records & reporting by their PRC-headquartered corporate clients.

Without confidence audited financial statements reasonably reflect performance of PRC companies listed on U.S. stock exchanges, can investors make informed investment decisions?

Regarding this question of informed investment decisions, in 2010 I told @rflannerychina"I see this as a legitimate long-term challenge in respect of China issuers."

And, here in 2020,@muddywatersre most recent report re#LuckinCoffee suggests the question remains.

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