Caixin
Sep 04, 2020 04:30 AM
FINANCE

SEC Probes China’s GSX Techedu Amid Tighter U.S. Scrutiny

GSX said its audit committee already engaged third-party advisers to conduct an internal investigation
GSX said its audit committee already engaged third-party advisers to conduct an internal investigation

(Bloomberg) — Beijing-based education company GSX Techedu Inc. said it is being investigated by the Securities and Exchange Commission as U.S.-listed Chinese companies face greater scrutiny on accounting issues amid rising tensions between the two countries.

The SEC’s Division of Enforcement contacted the company asking it to produce financial and operating records dating from Jan. 1, 2017, GSX said Wednesday in its second-quarter earnings statement. GSX said it is cooperating with the SEC.

GSX said its audit committee already engaged third-party advisers to conduct an internal investigation into allegations about its finances made by short sellers including Muddy Waters and Citron Research earlier this year. Shares of the company fell 12% in U.S. trading, the most in almost a month. Short-selling companies look for stocks that may be overvalued and bet their share prices will fall.

The online education company, which provides after-school tutoring services, is the latest case being investigated as the Trump administration threatens to delist Chinese businesses that fail to meet U.S. audit standards. The issue has gained urgency amid rising geopolitical tensions.

A recent accounting scandal at Luckin Coffee Inc. also shone a spotlight on the risks of Chinese companies listed in the U.S. Following an internal investigation, Luckin disclosed that fabricated transactions inflated its 2019 revenue by more than $300 million.

A high-powered group of U.S. regulators said last month that stock exchanges should set new rules that could trigger the delisting of Chinese companies, following mounting concerns that investors are being exposed to frauds. The President’s Working Group on Financial Markets said companies must grant American regulators access to their audit work papers to trade on a U.S. bourse.

The recommendations target a problem that has vexed U.S. regulators for more than a decade: China’s refusal to allow inspectors from the Public Company Accounting Oversight Board to review audits of Alibaba Group Holding Ltd., Baidu Inc. and other enterprisers that trade on American markets. Chinese regulators said last month they would be open to the idea of joint audits.

The threat to delist Chinese companies from American exchanges is driving a wave of U.S.-listed businesses to seek a trading foothold in Hong Kong. Alibaba Group Holding Ltd. pioneered the so-called “homecoming” listing model last year with a massive $13 billion share sale. Yum China Holdings Inc., China’s largest restaurant company, is targeting a secondary listing in Hong Kong as early as September, according to people familiar with the matter.

Contact editor Bob Simison (bobsimison@caixin.com)

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