Chinese companies listed in the United States are going through costly and time-consuming preparations to comply with tighter regulations starting July 15, a US auditing consultant said on April 03.
Those companies will have to comply with section 404 of the Sarbanes-Oxley Act - tough financial disclosure rules adopted by US regulators in the wake of the Enron fiasco - by providing an audit on the strength of their financial reporting controls.
Compliance with the rules can cost up to $7 million for larger US corporations. Some foreign companies are reconsidering listing shares in the United States because of regulatory oversight and the added expense.
"It costs a lot of money and took a tremendous amount of time," said Lester Sussman, the California-based managing director of resources audit solutions for Resources Global Professionals.
"The Chinese and Hong Kong companies will benefit somewhat from the experiences of companies in the US," he said, adding that Chinese companies seemed to be setting aside an appropriate amount to cover the costs.
Resources Global, which counts Sarbanes-Oxley business as a large part of its operations, attracted about 15 companies, including China Telecom Corp and Sinopec Corp, to a presentation it held in Beijing last week.
"The stage they're at now is very similar to where US companies were in 2004," Sussman said in an interview.
Implementation costs are driven by upgrading systems and bringing on more experts to make sure annual audits are done correctly, and these costs tend to fall each year, he said.
Sussman, a former audit partner at Big Four accounting firm Deloitte & Touche, said he has heard of a handful of companies considering delisting because of Sarbanes-Oxley.
The London Stock Exchange, for one, is also pitching for more business from Chinese companies, and its lack of a comparable regulatory code is listed as one advantage.
But markets such as Canada and Japan are setting up similar guidelines. Sussman said the real test is how investors view companies listed in tougher jurisdictions.
"Are they going to put a premium on stocks trading in those jurisdictions?" he asked, adding that they probably will.
Although costs may seem steep, Sussman noted that US companies found to have a "material weakness" in their reporting controls saw their shares fall up to 4 percent during the subsequent two months of trading.