Close the doors before the horses leave the barn

Last updated on July 2nd, 2019 at 09:08 pm

A BizTimes reader has asked me to comment on a recent news story about U.S. Securities Exchange Commission (SEC) action to get copies of the audit paperwork on nine U.S.-listed Chinese companies suspected of wrongdoing.

U.S. regulators charged the Chinese arms of the world’s five top accounting firms with securities violations, raising tensions in a regulatory standoff which experts say could kill off U.S. listings for Chinese firms if not resolved.

The move indicated that China was refusing to yield in talks with the United States over access to Chinese audit papers, trying to keep foreign regulators off of what it sees as its turf.

The audit firms say they are prevented from providing the paperwork by Chinese state secrecy laws.

The simple answer is, if the SEC had a rule that said that all listed firms have to provide yearly audits and request for audit work product, as a condition of listing, then there would be no problem.

Oh, wait, they do have such rules, so what are we talking about?

The issue is not a diplomatic row over sovereignty, although it makes a great storyline.

Chinese government overtly condones fraud by its overseas-listed companies by shielding their bad actions.

The fact is the SEC should prevent the problems instead of wringing their hands after the event. Last time I checked, the SEC was in the United States and had complete regulatory authority over U.S. listings. Having rules in place that require the listed companies to provide their audit and audit work papers prior to listing and yearly as requested, backed by a bond/guarantee by the company/auditor – take your pick – would bring most of this to a screeching halt.

Company fraud, as we well know from experience, can happen anywhere and at any level. HP, Siemens, Volkswagen, American Airlines, Arthur Anderson, BAE, BCCI, Bayer, Bre-X, Bristol Myers, Nestle, Chiquita, Deutsche Bank, Duke Energy, Dynergy, Enron, Exxon, Fannie Mae, Firestone, Flowtex, Ford Pinto, Global Crossing, Halliburton, Health South, Madoff, Libor and on and on…Do these names ring a bell? If you looked at the nationality of these firms, you might think that Germany would be at the top of the SEC’s “inquiring minds want to know list,” but I have not seen the front-page newshounds baying about this.

So what is with the new found evangelism against the Chinese?

First, in the vast majority of cases, the firms deserve it. They are not sophisticated in terms of how they try to hide it and in many cases they do not even seem to understand that things like conflict of interest are bad. In China, corporate/owner/investor relationships look like a hillbilly genealogy chart. But to the Chinese, having a powerful interconnected group is a sign of strength.

The reality is, China is in its Titan Period. Like the Gettys, Rockefellers and Fords who dominated our industrial revolution, Chinese corporate bosses have risen by their bootstraps and they have the same proclivities our titans did. Forget the notion that it’s all about Guanxi, those who have pushed to the top of the pile in China are the ones who can attract and use Guanxi and everything else they can get their hands on. Now, when these Chinese titans see a land of milk and honey, where trusting people throw money at companies, based on odd notions, it’s a bit too tempting. The candy is on the floor and baby wants it all.

In these types of cases, the SEC is supposed to play parent, to make and enforce the rules. The number of lawyers who now make their living suing Chinese firms for non-disclosure violations has created a lucrative specialty industry. It can therefore not be a surprise that “fraud” is going on, but to be making an issue out of the accounting, at this point, is more than a little disingenuous.

Like Louie, the police captain in Casablanca, who says he is shocked to find there is gambling going on while shoving his winnings into his pocket. The SEC has and continues to be a Louie, voicing outrage at behaviors it is supposed to be regulating. Last I checked, greed does not have a racial preference. So when you are tempted to think that those Chinese are devious degenerates, out to fleece the unwitting public who buy their shares, you might want to think about it as less racial/cultural, and more about our nature as humans.

In terms of the Chinese government’s response, they have no general interest in protecting most of these companies. This is not true in the case of State Owned Enterprises (SOE’s), but under no circumstances are they going to open a window into China for the SEC or any other U.S. government agency, just as we would not allow their government bodies to go poking around companies in the United States.

So, you can expect more SEC handwringing as law, accounting and consulting firms rake in fees for helping Chinese firms list. Hmmm…Sounds familiar…Did you just think “mortgage meltdown?”

Have a happy New Year.

Einar Tangen, formerly from Milwaukee, now lives and works in Beijing, China. He is an adviser to Heilongjiang Province, Hebei Province QEDTZ,, China International Publishing Group, Beijing Baotong and DGI DESIGN. He is also a weekly public affairs commentator for CCTV News’ Dialogue and the author of “The Kunshan Way,” an economic development history of China’s leading county level city. While in Milwaukee, he was a partner at Jackson, Morgan and Tangen, president of E-Tech and a senior vice president at Stifel Nicolaus. He chaired various boards in Milwaukee and was a member of the Federal Home Loan Bank of Chicago. Readers who would like to submit questions or suggest areas of interest can send an e-mail to

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