01/12/2022

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SEC adds Baidu, Futu and three more to list of companies liable under audit oversight law

The Securities and Exchange Commission (SEC) has added five New York-listed stocks to its latest list of companies liable under a US auditing oversight law, including four Chinese internet companies.

Futu Holdings Limited, iQiyi and Baidu are among the latest names identified under the Holding Foreign Companies Accountable Act (HFCAA), according to a March 30 statement by the SEC. Also on the list is Nocera, an agricultural services company based in Atlanta, and CASI Pharmaceuticals, which develops cancer drugs in Rockville, Maryland.

The HFCAA, enacted during the twilight of Donald Trump’s administration, requires US-listed foreign companies to comply with audit inspection rules under the Public Companies Accounting Oversight Board (PCAOB), or face expulsion from the stock exchange after three consecutive years of non-compliance.

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The SEC’s “role at this stage of the process is solely to identify issuers that have used PCAOB-identified public accounting firms to audit their financial statements,” according to the statement.

Under the “rebuttable presumption” clause in US legislation, companies identified by the SEC can dispute their addition. Weibo Corporation, which was added to the SEC list on March 23, has until April 13 to submit its appeal, while the deadline for the remaining five is a week later on April 20.

The SEC’s list amounts to a clerical entry. Still, it fans concerns in a stock market that is already jittery over deteriorating US-China relations in everything from a trade war that is showing no signs of relenting to disputes over technology, data, Russia’s invasion of Ukraine and even the origin of the Covid-19 disease.

When the SEC identified HutchMed and four other US-listed companies on March 8 as liable under the HFCAA, it led to a wipeout in the Hong Kong stock market for the stocks concerned. For now, China’s securities regulator is playing it cool.

“According to the SEC, it is just a normal procedure for the US regulator to enforce the HFCAA. Whether the companies added to the list would be delisted will depend on the result of the negotiation between China and the US over their cooperations in audit regulation,” a spokesman of the CSRC said.

There are about 200 Chinese companies – including this newspaper’s owner Alibaba Group Holding – with American Depositary Receipts (ADRs) listed on either the New York Stock Exchange (NYSE) or Nasdaq. The HFCAA empowers the PCAOB to determine whether inspections or investigations by registered accounting firms are deemed to be “complete” because of positions taken by an authority in a foreign jurisdiction.

Headquarter of Futu Holdings in Shenzhen on 9 December 2020. Photo: Iris Ouyang alt=Headquarter of Futu Holdings in Shenzhen on 9 December 2020. Photo: Iris Ouyang>

China doesn’t allow audit and accounting data to be taken offshore, but has empowered the China Securities Regulatory Commission (CSRC) to find a mechanism to comply with overseas accounting regulations. A new approach is being considered, where China’s finance ministry vets the audit data for state secrets and personal information before handing them over, the Post reported last week.

The SEC’s chairman Gary Gensler and CSRC’s chairman Yi Huiman have held three online meetings since last August to discuss the prospect of cooperating on audit regulations, and the Chinese securities watchdog agency has met the PCAOB, the CSRC spokesman said, adding that communications are ongoing.

Weibo operates a microblog site in China, akin to Twitter. Its shares fell by as much as 2.5 per cent to an intraday low of HK$187 in Hong Kong, after dropping 2.6 per cent to US$24.68 in New York.

Baidu’s logo at its head office in Beijing on August 4, 2019. Photo: Shutterstock alt=Baidu’s logo at its head office in Beijing on August 4, 2019. Photo: Shutterstock>

iQiyi is a video streaming service. Its stock fell by as much as 4.8 per cent overnight, before recouping most of its losses to end the day at US$5.04, 0.4 per cent higher.

Shares of Baidu, China’s dominant internet search engine, fell by as much as 4.8 per cent to HK$139.20 in Hong Kong after being added to the SEC list. It was not immediately available for comment.

Futu, an internet broker, fell 2.9 per cent overnight to US$37.40 in New York.

“The company’s American depositary shares will not be immediately delisted as a result of the identification,” Futu said in a statement. “Futu’s operations continue to be stable and robust as always, and we will continue to strictly abide by all applicable laws and regulations.”

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP’s Facebook and Twitter pages. Copyright © 2022 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2022. South China Morning Post Publishers Ltd. All rights reserved.