China’s shift on transparent audits

Beijing proposes allowing foreign regulators to check the financial reports of Chinese firms listed on overseas exchanges, a potential big win for integrity in global stock markets.

The Monitor's View

On Saturday, China seemed to adopt a set of values that has kept the global economy humming. Its top securities watchdog proposed to modify secrecy rules and grant foreign regulators access to the auditing reports of Chinese firms listed on overseas exchanges.

This could be a big win for more honesty and transparency in world stock markets. The ruling Communist Party has long forbidden Chinese firms from sharing sensitive information with foreign regulators, even at the expense of investors who want to assess the integrity of a firm’s financials and avoid fraud.

The party’s top-down control of commercial enterprises often forces it to demand secrecy. Major firms have party members as executives while the military has a strong hand in many high-tech firms. These are the kinds of secrets that Beijing wants to guard.

Yet more than 200 Chinese companies are listed on the New York Stock Exchange and Nasdaq, giving them much-needed capital and an ability to compete as global players. They could soon face possible expulsion under a 2020 U.S. law aimed at ensuring foreign firms abide by the same accounting rules as publicly traded American companies.

This threat of delisting Chinese companies on U.S. exchanges could be the reason China is rethinking its model of opaqueness on audit access. Many countries have had to learn the hard way that honesty and openness are vital to a free market economy. The United States itself tightened its accounting standards two decades ago in the wake of two major companies, Enron and WorldCom, collapsing after being caught cooking their books.

Dozens of countries allow U.S. regulators to monitor the audits of their companies listed on U.S. exchanges. The values inherent in honest accounting lift a country’s capital markets in the eyes of international investors. “High-quality financial statements enable the investor to determine whether she should invest her money in a company and on what terms,” says Hester Peirce, a member of the U.S. Securities and Exchange Commission.

China’s drive for global preeminence of its governing model keeps running into values at the heart of the international system. If it finally makes good on its proposal to allow foreign regulators to inspect audit reports of Chinese companies, it will recognize that values that sustain prosperity are not specific to a country but rather universal, helping all countries.