The Holding Foreign Companies Accountable (HFCA) Act: A Critique
Several hundred Chinese companies with a total market capitalization of approximately $1 trillion are listed on U.S. exchanges. Until recently, China prevented the Public Company Accounting Oversight Board from inspecting the China-based auditors of these firms, as required by the 2002 Sarbanes-Oxley Act. In late 2020, then-President Donald Trump signed into law the Holding Foreign […]

Jesse M. Fried is the Dane Professor of Law at Harvard Law School, and Tamar Groswald Ozery is a legal sinologist and Assistant Professor at the Hebrew University of Jerusalem. This post is based on their paper forthcoming in the Harvard Business Law Review. Related research from the Program on Corporate Governance includes Alibaba: A Case Study of Synthetic Control (discussed on the Forum here) by Jesse M. Fried and Ehud Kamar.
Several hundred Chinese companies with a total market capitalization of approximately $1 trillion are listed on U.S. exchanges. Until recently, China prevented the Public Company Accounting Oversight Board from inspecting the China-based auditors of these firms, as required by the 2002 Sarbanes-Oxley Act. In late 2020, then-President Donald Trump signed into law the Holding Foreign Companies Accountable Act which, as amended, requires the delisting of any firm whose auditors cannot be inspected by the PCAOB for two years in a row (the delisting rule). In addition, the Act requires any China-based firm whose auditor cannot be inspected by the PCAOB to submit documentation and make certain disclosures related to their ties to the Chinese government and the Chinese Communist Party (the disclosure rules). In 2022, China began allowing PCAOB inspections, averting (at least for now) mass delistings.
In a recent paper, The Holding Foreign Companies Accountable (HFCA) Act: A Critique, we argue that the effect of the HFCA Act on U.S. investors is likely to be negative. While China-based firms do pose unique risks to U.S. investors, the Act fails to mitigate—and may well exacerbate—these risks.