If you were under the impression that all companies listed on U.S. exchanges are subject to the same financial standards and regulations -- regardless of what country they call home -- allow Sen. Marco Rubio's recently introduced bill to disabuse you. They aren't, and he thinks they should be. But while the bill may be global in terms of its language, its real focus is on one country in particular: China.
And as Motley Fool Director of Small Cap Research Bill Mann tells Market Foolery host Chris Hill in this segment of the podcast, the way Chinese law has shielded its companies from proper accounting scrutiny is actually a real issue for investors. The two discuss why U.S. accounting firms can't do proper audits of them, just how big the numbers involved are, why challenging the status quo could have bipartisan support, and how it could cost American financial firms.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.
This video was recorded on June 18, 2019.
Chris Hill: I like to point to out everyone once in a while that Fool global headquarters is in Alexandria, Virginia. We are right across the Potomac River from Washington, D.C., and therefore Capitol Hill. I would say 99 days out of 100, we ignore what's happening on Capitol Hill. We're about investors and investing in business. Every once in a while, something happens on Capitol Hill that gets our attention because it is squarely in the wheelhouse of investors. I think this qualifies. This is a bill that's been introduced by Senator Marco Rubio of Florida requiring that all companies listed on American stock exchanges are subject to the same standards and regulations. While on the surface, you may look at that and think --
Bill Mann: "Duh!" [laughs]
Hill: "Aren't they already?" Certainly, U.S.-based companies are. But there are plenty of companies whose stocks are listed on the exchanges, but they are based outside the United States, that do not have the same requirements when it comes to financial disclosure. This seems a little bit like a no-brainer. Which in no way means it's going to become law.
Mann: Yeah. We can talk about what's at stake here. And really, as in a lot of things of this nature, they have a target in mind. The target in this case are the 220-some-odd Chinese companies that are listed in the U.S. China requires that business books be kept and records be kept in China, and the access to those books to anybody from outside of China is restricted. That means that U.S. accounting firms have very, very little real access to do full audits of Chinese companies. That's $1.8 trillion in market cap between all the companies that are listed in the U.S. So this matters a huge amount for American investors, because frankly, we saw a little more than a decade ago a huge number of Chinese companies who came public here, many of which turned out to be frauds. Shame on us if we don't assume that that possibility exists with the large number of Chinese companies that are listed here again.
Hill: I'm reminded of the great documentary which I believe is still on Netflix called The China Hustle. It really goes to some of those fraudulent companies that you mentioned. Yeah. As you said, when Senator Rubio and his staff were writing up this bill, they weren't taking aim at Spotify.
Mann: No! [laughs]
Hill: They were squarely looking at the companies in China.
Mann: These types of things aren't cost-free for the U.S. or for American companies. For example, Alibaba just announced that it was going to do a secondary listing. You would think that the U.S. would be a logical place for it. It's going to be a $20 billion listing. They're doing it in Hong Kong. It's often forgotten that, though they seem like utilities, the exchanges are companies. And many of them, including Nasdaq, are publicly traded companies. They attract investors by being trustworthy. You trust the U.S. exchanges because they're here, they've got regulatory oversight, you think that they are doing some sort of standard checking for the companies that they list. But they actually attract listing companies by making things easier for them to list. So there's this incredible tension. So the fact that the U.S. government feels like it should come in and say, "We're not able to see the books. We think this is a potential risk for American investors," this is really something. We stand on principle and say, "Yes, this should be done," but it's not free.
Hill: I'm going to ask you to be a political prognosticator. I apologize for this. Do you see this having real prospects in terms of becoming law?
Mann: I do, yeah, absolutely! It is perhaps an open secret that very powerful members of both parties are pretty quietly supportive of President Trump and the tariffs and all the pressure that he's putting on China. This is another one. President Trump has come out and said, "We should cut off Chinese companies from the U.S. capital markets." And I don't think that this is part and parcel of that. The PCAOB, which is the main accounting authority in the U.S., along with the SEC, has long warned about this. They put out a big white paper a year ago. But it sure is a convenient place to add a little bit of additional pressure. So I think this actually has a pretty good chance of passing.
