US-China accounting war: SEC adds Baidu, Futu and three more to list of companies liable under audit oversight law

Futu, iQiyi and Baidu are the latest named by the SEC under the Holding Foreign Companies Accountable Act (HFCAA), after Weibo was added on March 23
Weibo can dispute its identification by April 13, while the remaining five added can submit their appeals by April 20

Accounting and auditing

Enoch Yiu

Published: 2:22pm, 31 Mar 2022

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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, 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 American stock exchanges after three consecutive years of non-compliance.

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.

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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, which is showing no signs of relenting, to disputes over technology, data, Russia’s invasion of Ukraine and even the origins of Covid-19.

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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 cooperation in audit regulation,” a spokesman of the China Securities Regulatory Commission (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

China does not allow audit and accounting data to be taken offshore, but has empowered the 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 it over, the Post reported last week.

SEC chairman Gary Gensler and CSRC 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 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 before closing 1 per cent lower at HK$189.9 on Thursday, after dropping 2.6 per cent to US$24.68 in New York overnight.

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 before closing 3 per cent lower at HK$141.5 in Hong Kong after being added to the SEC list.

Baidu has been actively exploring possible solutions regarding the US audit requirements, it said in a statement after the SEC move. “Baidu will continue to comply with applicable laws and regulations in both China and the United States, and strive to maintain its listing status on both Nasdaq and the HKEX,” it said.

Futu, an internet broker, fell 2.9 per cent overnight to US$37.40 in New York. “The company’s ADRs will not be immediately delisted as a result of the identification,” it 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.”