SEC Probe Puts China Listings in Doubt [WSJ]
The U.S. Securities and Exchange Commission's high-profile attack on the Chinese affiliates of five major accounting firms calls into question the future of China-based companies listing on the U.S. stock exchanges at a time when accounting scandals have eroded investor appetite for these companies. […] The regulatory action will put a "further damper on Chinese listings in the United States," said Rocky Lee, a Hong Kong- and Beijing-based partner at the law firm Cadwalader Wickersham & Taft, which does due diligence on Chinese assets for foreign institutional investors. It also significantly increases the chances that China-based firms whose American depositary receipts trade on the U.S. exchanges will be delisted, if regulators in the U.S. and China can't reach an agreement over the disclosure of information, according to Paul Gillis, an accounting professor at Peking University's Guanghua School of Management in Beijing. "I'm not optimistic that a solution is reachable," Mr. Gillis said. "The biggest loser if it goes down this road is the American exchanges because it makes the U.S. a much less attractive place to raise capital."
U.S., China in Cold War Over Accounting Rules [BBW]
Over the past two years, the SEC has audited scores of Chinese firms amid concerns that many are issuing financial statements that don’t reflect their real operations. The alleged violations include overstating revenue and profit. Many of them have listed on U.S. exchanges through so-called reverse mergers—when a company buys a largely inactive shell company that already has a listing and so can avoid strict disclosure requirements. To date, the SEC has deregistered almost 50 companies, including China MediaExpress Holdings, and launched fraud investigations against more than 40 issuers and company executives. The investigations, however, have faced serious obstacles to gathering evidence within China. Beijing’s attitude has been that its own accounting system is fully adequate and that there is no need for the U.S. to conduct its own probe. And China’s security regulators and finance officials have been loathe to participate in any joint investigation.
U.S. market regulators are seeking more information from companies about the causes of big goodwill write-downs in hopes of avoiding investor surprises over the earnings charges.
How Tax Arbitrage Ended GE’s Foray Into Silicon Valley [Bloomberg]
[General Electric] seemed poised to become a computer giant in the mid- 1950s. Its small lab in Palo Alto, California, built one of the first machines able to meet the demands of modern consumer banking. Bank of America Corp., which contracted with GE, wanted the machines built outside of the progressively taxed Golden State to avoid $1.2 million in sales taxes, a large figure in the 1950s, but nonetheless small in relation to the bank’s profits. The GE executive in charge of the project, Barney Oldfield, hesitated to leave the nascent Silicon Valley, where Hewlett- Packard Co. (HPQ) already thrived. Oldfield estimated that the added cost of fulfilling the contract “if the headquarters and manufacturing facility were remote from the development engineering group” was “several million dollars. I thought this would tip the scale.”
Coburn: 'I would rather see the tax rates go up' than cap deductions [The Hill]
Sen. Tom Coburn (R-Okla.) said Wednesday that he prefers simply raising the tax rates on the wealthiest taxpayers to a Republican proposal that would cap deductions for those making over $250,000 per year. "Personally, I know we have to raise revenue; I don't really care which way we do it," Coburn said during an appearance on MSNBC. "Actually, I would rather see the rates go up than do it the other way, because it gives us greater chance to reform the tax code and broaden the base in the future."