Global Capital Markets
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Global Capital Markets

A Survey of Legal and Regulatory Trends

Edited by P. M. Vasudev and Susan Watson

This topical volume examines key developments in the law regulating capital markets, drawing on examples from around the world – including United States, Canada, Europe, China, India, and New Zealand. With perspectives from international scholars, chapters look at current issues including the regulation of crowdfunding, efforts in Europe for shareholder empowerment, hedge fund activism in Canada, international regulatory cooperation, and regulation of corporate governance in China through securities law rules.
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Chapter 2: Suspension of Chinese units of ‘Big 4’ audit firms: the question of moral turpitude

Qingxiu Bu

Abstract

The regulation of gatekeepers is primarily intended to ensure the accuracy of issuers’ disclosures. The ‘Big 4’ accounting firms (Deloitte, EY, KPMG and PwC) may face a moral hazard issue resulting from the perception that capital markets would not tolerate a reduction in their current number. Moral hazard amplifies when the Big 4 perceive that they are too big to fail. The problems experienced with Chinese reverse merger companies (RMCs) and Initial Public Offerings (IPOs) revealed multiple leverages between the court and enforcement agencies from companies’ home and host states. It remains a challenge in shaping the global governance of auditors when they are in the middle between two jurisdictions. This chapter examines the experience with the Big 4’s handling of Chinese companies listed on US exchanges and argues that the theory of ‘between a rock and a hard place’ in this context may not serve as an affirmative defence for the Big 4’s refusal to produce audit documents to US regulators. The chapter advocates multi-jurisdictional cooperation as a meaningful tool to promote the integrity of audit, financial reporting and global capital markets. Keywords: • Chinese Reverse Merger Companies • Cross-border enforcement • Sarbanes-Oxley 106 • Big 4 audit firms • Audit investigation • SEC

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