Transcript: Will Chinese Companies Have to Delist Off US Stock Exchanges?

A conversation with Claudius Modesti, Partner at Akin Gump and former Head of Enforcement at PCAOB

· Transcripts - CBD


Art: Welcome everybody to another episode of Ganbei. I'm your host Art Dicker. Today, we have the absolute pleasure to be joined by Claudius Modesti. Welcome Claudius. 

Claudius: Hi Art, good to be on your program.  

Art: Thank you.Yeah. This has been a long time in the making we've talked before I know. And I've just been so anxious to have you join the show. So really quite thrilled. Now you were a partner at Akin Gump, which is of course, a top law firm in Washington, DC. Your practice there, I know is lots of spends that the area of lots of different regulatory and enforcement practices previously, you were an enforcement attorney at the SEC. 

And prior to Akin Gump, I know you were head of enforcement for the Public Company Accounting Oversight Board, which is also known as PCAOB. Maybe not everyone is familiar with the PCAOB. So would you mind walking the audience through a bit without getting into your experience? We'll get into that, but walking with the audience into more about PCAOB, what, how it was formed and what its mission is? 

Claudius: Thank you Art. I'm happy to do that. So the PCAOB was born out of the Sarbanes-Oxley Actit's title, one of the Act back then, we were proud to say we were the first thing that Congress had in mind when they passed the law. And it was, it was an important moment in the history of US capital markets and US regulatory history. 

It was after Enron and WorldCom. It was after Arthur Anderson had struggled with certain audits in those cases. And it was the firsttime that the accounting profession had its own regulator, but the SEC had some broad regulatory authority over the accounting firms. But now the PCAOB wasstood up as a, actually as a nonprofit, as a non-governmental agency, but subject to oversight by the SEC. 

And I think the most important thing to think about is thatthe PCAOB has very substantial regulatory authority in the form of inspection authority and that any firm that wanted to audit publicly and doesaudit publicly traded companies with subject to registration, with the PCAOB. And subject to its inspection authority. 

And I think we'll talk a little bit about that as we go along. And then it also had important to add a standard setting authority andnow set the audit standards, which previously the AICP had done. And it had enforcement authority, which was complimentary to the enforcement authority that the SEC has. 

Art: Got it. Okay.Yeah, definitely. I think people will remember this, the collapse of Arthur Anderson and Sarbanes-Oxley, and it really caused everyone to look to, to look in the mirror and see that there was a lot of regulatory oversight, which was missing there. And so that's where it's where PCAOB stepped into the void. 

But people may not have thought at the time that there would be a relationship to China and Chinese companies. And of course this is20 years later for the audience don't let me help them take a step back a bit.

So traditionally, as many of the audience know Chinese tech companies, Chinese companies, and in general, but especially tech companies have been going and listing in the US on the capital markets there, NASDAQ NYC for 20 years, like so many other tech companies they've been drawn to, I'd say an SEC disclosure based system where a company does not have to be profitable yet to list and can have things like dual class sheriffs structures. 

And of course the US has th deepest broadest pool of capital available out there and to save Claudius the trouble a bit. Let mesummarize the rule that we're going to talk about your real briefly under the proposed new rules for PCAOB, certain foreign companies now are, that are listed in the US may have their trading suspended if for three consecutive years. 

The PCAOB is unable to inspect or investigate an issuer dueto a position taken by a foreign government where that company's auditoroperates. Basically, if there is government interference where the PCAOB cannot conduct the audit of the auditor's work, then there is going to be this rulekicking in and protect. 

Triggering potential, potentially a delisting. This is veryrelevant for Chinese companies as we'll get into in a second, but Claudius didI leave anything made any major points out there of what this new rule is about? 

Claudius: No, Ithink you got to the core of it. There's also going to be disclosurerequirements about whether a SEC issuer is owned or controlled by a government entity. 

And then for foreign-based SCC issuers, they're gonna havedisclosure requirements around whether, for example, there's a member of the Chinese communist party on the board of directors. So there's a broader set of disclosure requirements, which. 

Is not within the purview of the PCAOB. It's a disclosure issue that some would say is more politically focused rather than focused froma pure regulatory point of view. But nevertheless, it's an important element of the new holding foreign companies accountable act.  

Art: Yes,absolutely. There's definitely more to it than just this part, but this part is perhaps let's just say the most newsworthy these days. Anyway. So we haven't got quite into the specifics of your experience there and that's saving the best part here because you are probably uniquely qualified, I think, among a small group of people to talk about this issue and the history behind this issue, especially because first of all, China, in the US of course, this is not a new issue. 

This issue of gaining access to the audit papers of Chinese listed companies in the US. I know there's been some dialogue on and off overthe years. And, and I know specifically you were intimately involved in the process as director of enforcement at the PCAOB and including negotiations over an MOU in 2013, with the CSRC and the Ministry of Finance here in China. 

And I know implementation of that MOU broke down afterwards,and I just wanted to get your take on, on everything, leading up to that andwhat that process was like, and the negotiations, as much as you're able to talk about that. 

Claudius: Sure.No, thank you. All right. So just to back up a little bit, the one unique thingabout the PCAOB is that the Congress gave it this extra territorial reach, right? 

So if you're a foreign based accounting firm and you want to audit a publicly traded entity in the United States, you have to register withthe PCAOB. And so all the rules applied to the foreign based accounting firm, as much as the domestic based accounting firm. And at first, that was a controversial rule. 

A lot of countries raised concerns and their comment letters to the PCAOB about the reach of the PCAOB jurisdiction. But over time, we negotiated with our European counterparts, some of our Asian counterparts, excuse me and others in order to accommodate access to these accounting firms. And I think Art, the assumption was that even in the case of China, understanding that China is unique. 

It's now the second largest economy in the world by a large margin, that there would be, there would be an opportunity to come to an understanding. That the PCAOB would be able to get to the information it needed to performance inspection and enforcement functions and that the Chineseauthorities and the companies and accounting firms in China that would be impacted by the PCAOB would be able to honor their commitments under Chinese law. 

So I think that was the working assumption by everybody bythe US side, US regulators, the US markets and on the Chinese side. And so overtime, there was this ongoing dialogue about how to effectuate PCAOB access. And the approach we took was to try to use the models we had with other countries to make that work. 

And we, there was a lot of exchanges, a lot of in-person exchanges, both here and in China with the Ministry of Finance and with the CSRC at various levels. And I think the Obama administration had continued the Strategic and Economic Dialogue meetings where State and Treasury on our side, and then the Chinese counterparts on their side would meet there would be sidebars abouta PCAOB access. 

So it was always in the mix in terms of the larger Chineseand US relationship. And then we did make some progress and we came to this understanding under the MOU, which was enforcement focused. It did not encompass the inspection function. But the idea was to set up a mechanism andthe mechanism allowed for the US side, in our case, the PCAOB to get access, to audit work papers. 

Now the MOU specifically contemplated that the Chinese sidewould be able to review the work papers, for purposes of determining whether,the information, those work papers contain, state secrets. And in fact, that concept was in many of our agreements with our European counterparts and not to focus on the French, but the French and others had their own concerns oversovereignty. 

And so that concept allowed for the foreign regulator to take their own laws into account before turning over information. I think inthe case of the Chinese authorities, We didn't have as much clarity about how they would implement that. We had some ideas and the Chinese system, there's alot of different constituents in their bureaucracy that have a say, including the, probably the most significant part of their government in some ways, which is the State Council. 

And the State Council had significant overview over theChinese economy and say over what is allowed and not allowed in Chinese laws. But we were operating with the CSRC and the MOF, and we had a based approach that we had set up. And then the question was, how's it actually going to work in practice? 

What are we going to be able to get access to? Now, remember as we're approving the MOU with the Chinese authorities, the SEC had just suedthe largest accounting firms, Chinese affiliates, because they hadn't produced work papers. And so the MOU was an icebreaker moment because it finally opened up a channel of information in terms of these Workpapers that hadn't beenopened before. 

So that was chapter one. No, that was the initial go around with the Chinese authorities. And it was, I think, I believe it was the first time the Chinese authorities had entered into the agreement to provide a foreign regulator with access to working papers. So that was significant in and of itself. But that was chapter one. 

Then we have to go on to chapter two and just let me know when you're ready.  

Art: Sure. I thinkwe'll get to that real quickly. One, one thing I remember at that time, that date is relatively significant as well, because that was when a lot of Chinese companies had listed. Very quickly, let's say. And I believe through backdoor listings that they're called reverse triangle mergers, and so forth. 

And there was, they were listing without necessarily going through all of the normal processes. And then of course not unique to Chinesecompanies, but a disproportionate amount of those companies were Chinese companies. And I know that was when the time, and I think Muddy Waters was outthere. And a lot of the, a lot of the pushback was probably coming that Chinese. 

Companies some not all, we're not transparent enough. And soon. Was that discussion, was that kind of a recent history in the mix? When,and can you say if that was giving kind of momentum to this building towards this MOU at the time?

Claudius:  Yeah, absolutely. In fact, the PCAOB is office of research issued a whitepaper. 

About the state of reverse merger entities, which arepublicly traded because they it's a private entity that goes into a publicshell and then maintains this listing and its registration with the SEC. And we did a white paper on that space, that capital markets space, because we had concerns about the disclosures, the audit that was being done, the audit work that was being done in that, it was interesting in that case, many of the audit firms were US-based and they were auditing these Chinese reverse merger entities. 

And so we actually had access to their work papers because the work papers had been brought back to the United States. And so we had insight into what was going on that we in the SEC brought cases against those audit firms and that market of course, reacted to that regulatory scrutiny andstarted to shrink. 

But as you said, Art, that reverse merger. Shell world has been in existence for a long time. A lot of entities take advantage of that. Alot of different jurisdictions take advantage of that. The SEC tightened some of the disclosure rules, but it still, it still was available. So that was the first go around where both we and the SEC, and started to think differently about that space, but that was not the large cap. 

China based issue or situation that came on and that came onto the radar screen a little bit later, but that was the first entree intothe issue that, that we're now talking about.  

Art: Yeah, and wedo see, of course there's been more pressure now more recently, and this issue is an issue never went away, but perhaps let's say got a new lease on life with some of the more recent scandals or whatever you'd want to call them luck. 

And of course it's the most high profile case of, but there've been quite a few of companies engaged in from anywhere from inappropriate to fraudulent accounting practices and, and. Yeah. So that's so this is issue is back on the spotlight and very relevant today. And it seems like the headwinds are while there's less headwinds, if they're ever worked for getting this done. 

And I'm curious, based on all of that, what do you think isthe chance for some kind of resolution of this issue? There's no shortage of Chinese companies, which continued to go public in the us. And is that it almost strikes me as that. They just assuming that this issue is going to get resolved. And what's your take on that? 

Claudius:  It's hard to tell. I'm not overly optimistic. And I say that because there's principles at work on both sides, which are really important toeach sovereign, let's start with the US side. We view this as a very simple requirement, basic foundational to our capital markets it's been in place for, for now, as you said, almost 20 years and it's access to work papers to audit work papers. 

So from the US perspective, it's not a particularly intrusive requirement and we're not asking for trade secrets. We're not asking the US side isn't asking for trade secrets, not trying to get into, it's not necessarily interested in sensitive information. It's the type of thing that auditor's actually United States if they're auditing a defense contractor, that's publicly traded. They have to be careful about what they access and when they do access classified information, it's not going to show up in their work papers. So we're used to dealing with sensitive topics in the context of the public company audit.  

And so the US side's position is the rest of the world, appreciates the US need to oversee the accounting profession this way to improve audit quality and protect investors. And it seems to be working pretty well. But it hasn't disrupted markets. It hasn't disrupted necessarily how people view the public companies that are inspected, whose audits are inspected. 

Now on the Chinese side, there's a very different principle at work, which is we have our own view about what information are publicly arepublic interest entities. Which are state-owned, but are private entities as well. And what information we want leaving the shores of China. And we have avery different idea about what we think is in our best interest to protect. 

And we need that. We need that principal honor in the course of our commercial dealings, I think the US side thought there was a little moregive here. And the reason we thought there was more give on the Chinese side was for example, When a Chinese pharmaceutical manufacturer is producing drugs for the US the FDA is allowed to send inspectors into the factory. 

Or when we, when San Francisco had a contract to build the new bay bridge and the steel was being supplied by China, they sent inspectors over to inspect the steel manufacturer. But I think as the Chinese economy matured and continued to grow and get more sophisticated, I think they saw this audit requirement as being overly intrusive.  

And they really believe I to this day that they can supply a vast majority of the information, but they need some say. And I think the US side doesn't want to assume the risk that if something's withheld and a Chinese company turns out to have financial reporting issues that people will say, well, the us regulator agreed to a compromise and it didn't see what it was supposed to see. 

And now US investors are harmed. And the Chinese side are well. Yeah, we understand. But you let these companies in, you allowed them tolist all the regulators, allowed them to come in. The capital markets have embraced them in the US side and they don't seem to be that concerned about thelack of access to audit work papers. 

They've known about the lack of access now for 15 plus years. So I don't see, I don't see there being a, I don't see there being acompromise on this. Hmm. And so the question is, can they come up with a, like a dry run in the space when the US side gets access? And if they do have a dry run where their actual actually allowed to get to the nitty gritty issues of trying to figure out what they really need to accomplish their respective goals, maybe we get there, but I think there's been a lot of opportunity for that. 

And I think we're, I think we're at a point of brinksmanship on for both sides and. If I know you're going to get to the start, but if Chinese listings have an off ramp, if they have an alternative where they eventually can get to liquid markets where they eventually can get access to a broad base of investors and maintain their cache, their overall cache. 

You know, the US system has this cache that I think is unrivaled. It also has protections that are, I believe unrivaled, but if they'reable to accomplish this in other markets, as a Chinese based company and the attractiveness of the kind of investment in Chinese companies are maintained, Ithink it's very hard for the US system to accomplish what they're trying to accomplish. 

And that's where the rubber, when the rubber hits the road,we're really going to see. Whether this, bringing some in ship can be maintained by the US side. And I think time will have to tell and his heart that the law has this three-year ramp, which the clock will start ticking once the SEC starts to identifying issuers. 

And then you have three years of non inspection that willtrigger the ban and people will say three years is a long time. It goes quickly. And I'm not sure us policy toward China is going to allow for much compromise on this. And I don't think Chinese policy toward the US is going to allow for much compromise on this. 

And I have to say our, this issue is a tail wagging the larger dog, but it's not really wagging much. It's just the tail. And that Isay that because there are larger issues between the two countries that are going to dominate their dialogue and discourse. And that'll drive whether this becomes a point of compromise, right? 

I don't think you're going to see a point of compromise hereleading the way to other compromises and other agreements. It's going to be theother way around. And that's why the law so important is it's now an automatic trigger. The regulators really can't avoid the issue anymore on the US side.And the Chinese side is forced to decide how much do we want to work with the American side on this in order to maintain access. 

And that's where this whole off-ramp issue is really important. For, for these Chinese companies, it really is. 

Art: You hit the nail right on the head. It really is a bit of a microcosm for the broader relationship. And maybe some of the breakdown of the trust that's there because what this whole mechanism is straightforward. 

But as you've alluded to too, it does rely on a certain amount of trust. For example, maybe from the Chinese side, trust that the USreally is only after certain kinds of papers and not interested in others, as yoUSaid, which I think which I certainly believe that's the case. But from the Chinese perspective, of course, they're not going to give the benefit of the doubt. 

And from the same side, the us side is not going to give them any benefit of the doubt to China. That there's certain things are beingnot fully disclosed and so forth, full access has given. And I think so much of that depends on yeah. On trust. And we're not in a very trusting environment right now.  

So that trust needs to be reestablished or at least improved from kind of the need year it's at right now, before, before then other thingslike this can fall into place. One of the things. One of the things that you touched on, which I also find quite ironic a bit, because if correct me, if I'm wrong, but my understanding of the US has always been that and the SEC, and the markets has been a disclosure based system. 

Meaning when China, and we talked about this with our listeners who followed an episode three weeks ago, we talked about this called the VIE structure, which is a variable interest entity structure. And it's what most Chinese companies to this day still use to list, including the first one, Sina.com20 years ago. And it's a, it's a structure, which is, is not probably ultimately not the most enforceable structure. I don't think I'm breaking any news on that here, but they found that structure could work in the US because everything is disclosed and it's, uh, that's one filing. Everything is in it's fully disclosed and transparent, and it's up to the investors to decide, okay, this structure I've seen read all the risk factors, assuming they read all the risk factors. 

And this is a real, this is a company that I want to invest in eyes wide open. And that's I think for the longest time has been relatively unique to the US even compared to let's say Hong Kong, which is another big market, but it's tended to take a more activist role in reviewing propspectus.  Is that a fair characterization?  

Claudius: Yeah,it's interesting. I think it is. I think what's interesting about the VIE structure is that the SEC division of corporation finance. Reviews, these registration statements for these Chinese entities. It asks, if you look at the comment letters, which are publicly available over with a lag, you'll see, they're asking a lot of questions about the VIE structure and the contracts in place and the enforceability, those contracts. 

I don't think many of those structures have been put through judicial stress tests. And unless you have a controversy that really brings these contracts to a head. Which I think the Chinese companies are going to avoid those controversies. I think they're going to find a way to resolve thembefore they get into, in front of a judicial body in any significant way. 

But nevertheless, they are, they, their contractual arrangements are in place. They haven't been stress tested. We don't know if their provisions. That are, that are not reflected in those agreements, which may, may undo some of the arrangements and some of the ownership of asset issues and things like that. 

But for the time being the US market seems to be very receptive to that. And I think, I think they, when they think about their investment, they build in a risk premium for things like that. Like you do with any investment, you make you figure out your risks. You allocate the cost and the element of risk that you're investing in. 

And you decide whether you think it's valuable enough to,you know, take a chance on. And I think he was investors are used to doing that. In fact, I think that's one of the strengths of our market. Now you say are accurately that the SEC system is disclosure based. Absolutely. But then the question is if the SEC ever had to enforce its disclosure requirements, what are what's available to it? 

And I think that's why you have the HFCA right now. Is that both the SEC and the PCAOB, generally speaking have been frustrated in carrying through some of their enforcement capacities. And that's where again, I think like I'm on the Chinese side. I'm thinking. Yeah, you may want to tell me thatthere was a disclosure violation, very significant that's important to capital markets. 

We get that. But as soon as you start using your subpoena authority and start taking sworn testimony and start getting emails, you just don't know where that leads. And I think any sovereign has to think about that when another sovereign comes into your country and starts asking yoursignificant crown jewel companies to produce information. 

And I look at Switzerland. So it's the has very strict rules. If you're a regulator, you can't even call a Swiss company withoutviolating criminal laws whatsoever. And you can save Switzerland's you need there. They've always been unique, et cetera, but that's just one example. It all depends how sovereigns want to protect their interests. 

And I think what you're seeing for the first time is the US is hitting a situation where it's not getting its way. It's used to getting itsway on issues like this. If it worked with each other foreign country through the audit regulatory system to get these understandings and cooperative agreements, they've worked really well. 

It's a tribute to those foreign counterparts who are terrific people. I know many of them, I negotiated with many of them, but China is different. And I think for the US side, once you, once you think about that issue, there's only so many solutions you can come up with and disclosure under the US system only gets you so far because the US system needs to reserve the right to bring enforcement cases. 

And that's unique when people think about the US system,they forget that we are one of the strongest enforcement minded, regulatory regimes for our capital markets in the world. And on the one hand that strengthens our capital markets and it makes it attractive because investorsfeel protected. On the other hand, it makes it difficult for other sovereigns to contend with our regulatory requirements because they view it as intrusive. 

And the Chinese situation is just bringing that to theforefront.  

Art: That's a very good point. I don't think that it's always so obvious to people thinking about the different regulatory frameworks, that again, myself in that bucket, where you're you think of the SEC as a yes, as an indicted disclosure based system. 

But as you're saying, a disclosure based system is only as good as this as the enforcement mechanism is there to back it up versus again,some place that I'm more familiar with, like Hong Kong, where you have a more activist role vetting companies on the way in and on the way. As they get onto these markets, at least historically, that's the way it's been. 

And then afterwards, maybe there's less reliance on enforcement records because they've, it's been a harder bar to reach, to get,to get on the market in the first place. I wonder though, if, and I think we alluded to this a bit already as the US is at least. Seen as a more there's this risk. This is a very tangible risk that these companies may need to do to the list. 

In three years after the clock starts, Hong Kong is a verydeep a capital market, but I am going to get the numbers wrong. You're I think that the market cap of the US has set something sent seven times that or something like that. So there's still a huge gap. And Hong Kong historically has adapted the most famous case. 

Of course, Alibaba listed on NYC in 2014. Precisely after long negotiations with the Hong Kong stock exchange for getting a dual classshare structure approved in Hong Kong just refused. And I think regretted that and changed. And so I'm wonder if Hong Kong or other markets are going to beeven more accommodating or are, or we're less inclined to follow the US role of on regulating markets. 

If it means that they get all of the prize, Chinese companies, is there some aspect of competition that will be going on here? 

Claudius: Yeah, absolutely. And the evolution of other markets may not be quick enough for someof these Chinese companies to move off the US exchanges, but certainly the legislation has accelerated those processes. 

And then China itself with China Next. And they're going from an IPO approval system to an IPO, typical, more typical registration system that will allow over time. I imagine a steady or flow of IPOs to come through the China export. That's just another facet which will evolve. It'll take time. Those regulatory regimes are very hard to set up and implement, and, but I expect that the US laws significant accelerate for this and. 

Um, I'm expecting that the London stock exchange will find ways to attract Chinese companies, the Hong Kong. And I think there's, I think there's going to be a surprise out there. I think there's going to be another jurisdiction. That is going to develop opportunities. It may not be able to compete immediately, but there's too much, there's too much money at issue and there's too many hours. 

There's too much opportunity at issue. And then what we'regoing to see is we're going to see companies that are going to fall off completely because they can't compete in their particular industry and they can't go private necessarily. And the China now has this anti monopolistic law that's coming online and the tech area, I think you may have seen Morgan Stanley just issued a research report, cautioning against investing in some Chinese tech companies. 

Not only because of the anti-monopoly. Legislation in China,but also because of the PCAOB rule, um, proposal that, that just came up onunder the HFCA. And so you have these multi streams coming together, both on the Chinese side and on the US side that are creating these new pressure points for some of these Chinese companies. 

So that's the other part of this mix that we can't necessarily predict right now we're focused on the US rule about China listings, but there are other things that are going on simultaneously. Now in anarrow sense, places like Singapore, which if you're a Singapore based company, you have to have a Singapore based auditor and then starting in 2022. 

If you're a foreign-based company listed in Singapore,you'll have to have a Singapore based auditor. So they're actually movingcompletely off the foreign-based audit firm concept. And so Singapore is unique that better than I do, but will other jurisdictions try to domesticate theiraccounting profession that way and say, you have to bring it all in country. 

If you want to be listed here. I don't see that happening inthe US I think we still want to maintain an openness to form-based issuers around the world that use foreign-based accounting firms, because we've seen how that's been able to work well. But this law is it because it's targeting the Chinese and Hong Kong companies listed here is going to have a negative impact. 

And then I think investors over time as they get closer and closer to that three year mark are going to get more and more nervous. But I expect investors to play the Chinese, to continue to invest in these China-based companies, as long as they're getting a return on their investment. And it's very hard, I think, to duplicate those returns with other comparable companies. 

And that's just how the markets are going to work. And untilwe see some change in the US Chinese, the dialogue around this, I expect peopleto work up to that line of the law. Coming into effect for the trading bad, as much as close to that line as they can to take, to capture the returns. I think US investors are used to taking those taking on those risks. 

Art: Yeah. That'sa good point because there have been plenty of, as we've mentioned a bit already, there's been plenty of Chinese companies again in the perhaps the most high profile of companies imploding, although remarkably lucky. And it's still around that the companies that, which wish investors losing their shirts in the process. 

But then for those that do well, as you said, the risks are there and the rewards are the big risks, big return. That's the name of the game in a lot of ways, we actually. Originally connected, I think about a year ago over, over the login case. And I remember that case, this will pick up on a thread you were just talking about earlier that the more and more local countries and maybe exchanges are figuring out ways to regulate their own auditors, their own accountants, their own professionals and companies, which are primarily operating in those markets. 

And my critique at the time of writing an article, which Ithink you read was that that companies like Luckin would in the future be verywell served by and be prevented by local oversight and enforcement against local enforcement against local auditors, who I think in China, it's no secret have been traditionally pushed around quite a bit by issuer companies here. And I wonder if you agree with that assessment at all.  

And also my other critique was that I just thought, gosh, it must be really hard for someone like PCAOB to conduct an audit of the auditorsof the working papers, given all of the language and culture and system differences that I deal with every day as a lawyer here. And I can only imaginesomeone in the US having even more difficulty, what would the actual mechanisms really work if there were in place for Chinese companies? 

Claudius: Yeah,no, it's a great question. Let me start with the second part of your question.Then I'll get to the first part. Look, the PCAOB historically has had a large international footprint in terms of its inspections program, and it has found a way to overcome language barriers, overcome distance, overcome dealing with personal data and data privacy. 

And in the case of China, at least when I was there. We had several native speaking or native Mandarin speaking inspectors, and they were assigned to review work papers that were available to review work papers that were in Mandarin. So that really wasn't the question. And you could findlocations to meet at whether it be in the home country, just outside the home country. 

So there's ways to accommodate those types of sovereignty sensitivity issues. And there's a way to exchange data, to protect data and accomplish people's respective purposes. 

I don't see that as the challenge and particularly givenwhat we just experienced with the pandemic, the ability to conduct your workremotely has only been enhanced and been strengthened. That was a terrible way to have to go through that. But that's what we've seen in the commercial world. So going to the, your first point. 

So I don't see that as an issue. I just, that I don't thinkthat's, what's creating this chasm and this disagreement at all. Now on thefirst question is I don't see other sovereigns focused on China based issuers in their markets. The way the United States is. And it's not that they don'tcare, but I think they're looking to see what happens here. 

First, they're expecting the us process to work itself out,and then they're going to learn their lessons and decide for themselves. Does that make sense from a foreign policy point of view for us from a domestic economic policy point of view? Should we pursue the same strategy and how doesthat fit into our larger China relationship? 

But I don't see there being significant pressure points andother capital markets outside the United States for China companies for on thisissue, maybe on issues of national security and things like that. That, but that's a different question. And then the local question in China is you haveregulatory authority over the Chinese auditors. 

So the Ministry of Finance and the CSRC share that authority, the Ministry of Finance is more focused on Chinese auditors that operate in Hong Kong and another jurisdictions. And the CSRC is focused on the domestic based auditors. And they've shown some interest from an enforcementpoint of view and bringing cases against China based accounting firms. 

But what they haven't shown an interest in is looking at the audits of the China-based companies listed here. And they have historically said, this makes sense to me, look, the foreign markets accepted these companies. They're not listed here. And you have to worry about thosecompanies, disclosures and their audits. 

Because they're not based here. They're not operating in our capital markets the same way. Now, when you start having dual listings in both Hong Kong and the United States, I'm curious whether that approach is going to be maintained and whether the CSRC and MOF may start thinking differently about those audit firms and those audits. 

But at the end of the day, the Chinese government is veryinterested in developing a lot of bench strength with their own accounting firms, their domestic counterparts. And I don't think in that effort to stand up those accounting firms that they want to. Over scrutinize them, but they want to give them opportunity to build markets domestically and possibly even abroad and create an international footprint the way the Big Four has done. 

And that's a very long-term plan, but I think. With that long-term plan in mind. I'm not expecting there to be any heavy scrutiny of theChina based accounting firms. Certainly not a comparable scrutiny to what we have in the US regulatory system.  

Art: That's fair.I, I think absolutely there is. It's. 

Something of perhaps a timing issue with this. That's going to be a lag of timeline for these firms to develop. I think that when the lock-in case broke, I think that was, of course there was a few people on the Chinese internet space, celebrating hop a little bit immaturely that we look at it, we fooled them again, but that was the minority. 

And I think most people just thought it was, it was such a it's shameful or I'm not sure what the right word is, it's, it's not something to be proud of at all. And it's quite, it's all, it's tarnishing the reputationof China and China Inc, and so forth. So I do think, I agree. I think there's going to be that the China's going to keep focusing on developing its own accounting industry, its own and set higher and higher standards. 

But yes, it's going to take time to get there. And is it. Adequately protecting US investors enough in the meantime, that's a very goodquestion. And probably not it isn't, it is probably not. I think that'sClaudius I think this was really fantastic. I, you are just the perfect person to talk about this issue and there's so many issues almost every week. 

Now I have. There is something again, we were talking earlier, we talked about the Xiaomi case last week before, before that we weretalking about the disclosures of vis. And so there's no shortage of issues in US China relations. And this is really right up there at the top of the list as well. And we found the perfect person to talk about it. 

So thank you Claudius for joining us. And how can people reach you if they want to maybe spend a bit, talk a little bit more about yourpractice and how people might be able to reach out to you and how you could best serve them if they need help.  

Claudius: Sure.Thank you. All right. I appreciate that. I'm a white collar partner at Akin Gump - we have a terrific white collarpractice. We have a global footprint. We have an office in Beijing, Singapore around the world. I'm based in Washington, DC. I represent accounting firms before the SEC and the PCAOB I represent publicly traded companies as well in front of regulators, including the department of justice. 

I do conduct internal investigations of all sorts, but I mostly operate the accounting fraud and the auditor defense area.And I know many of the foreign audit regulators from my work, and I'm very familiar with, with who they are and how they operate. So I can, I think I can be helpful as people encounter issues, not just in the US regulatory system, but the foreign regulatory system. 

And so that's principally where I've been operating, butit's a pretty broad based practice. And I get to do I get to do a lot of intriguing things, puzzle solving and, and defend people in an effort to, toaccomplish what they need to accomplish. Particularly as the regulators are scrutinized  

Art: and you wouldhave very insider insight into how those regulators think. 

And so that's, that's invaluable. I'm sure. Great. Well,thank you, Claudius. It's really quite an honor for you to come on our show.Really appreciate it. I know the audience will get so much out of this episode and I just want to thank you again for coming on. Claudius: Thank you so much for having me. I reallyappreciate the opportunity and best of luck to you.