In an attempt to address fraud among listed companies on US stock exchanges, the Securities and Exchange Commission has introduced new measures increasing the transparency of the listing process for foreign companies, according to market sources.
Previously, domestic companies were required to make public any corrections to a listing application, according to an industry lawyer specialising in private equity and international IPOs. Foreign companies, however, could keep any discrepancies undisclosed, making it much harder for regulators to spot fraudulent activities.
Foreign companies may look for a way out of paying higher advisory and auditing fees to satisfy public market regulations and opt for private equity investment for growth
Now foreign companies will have to make public any corrections suggested by the SEC after their original application to list, a rule that should reduce the ability of foreign companies to hide accounting irregularities.
Sources said that the regulation undoubtedly “increases credibility” for the stock exchange. Those companies that are deterred by the ruling are most likely not suitable to list in the first place, he added.
However, one US private equity lawyer said that the regulation may not be meaningful enough to make a significant difference. Although it may root out smaller companies with accounting discrepancies, it could make the public markets too costly an option.
The private equity industry may benefit, he said. Foreign companies may look for a way out of paying higher advisory and auditing fees to satisfy public market regulations and opt for private equity investment for growth.
The regulatory move follows a slew of fraud allegations surrounding accountancy irregularities in Chinese companies, highlighted by the Sino Forest ordeal last year, when a short-seller questioned the company's asset claims.
More recently the SEC has reportedly been asking advisory firm Deloitte for documents on the accounts of Chinese software company, Longtop Financial Technologies, after suspicions over its cash balances. Deloitte dropped Longtop as a client in May 2011.