Question

Corporate governance questions

Many foreign companies list their shares in the U.S. market and are thus subject to the monitoring of U.S. auditors and securities regulators such as SEC and PCAOB. Discuss the benefits of cross-listing shares in the U.S. market by foreign companies and the challenges to monitoring foreign companies that U.S. auditors and securities regulators face.

Answer 1

Cross-listing refers to the listing of a company’s ordinary shares on a different exchange other than its original stock exchange.

v  Benefits of cross-listing:

1.      Increased market liquidity :

Cross-listing enables companies to trade its shares in numerous time zones and multiple currencies. This increases the issuing company’s liquidity and gives it more ability to raise capital. Foreign companies that cross-list in the United States of America do so through American depository receipts. This term applies to foreign companies that seek to list their stocks on United States-based exchanges.

2.      Market segmentation:

Market segmentation is the practice of dividing a large market into clear segments with similar needs. Cross-listing enables firms to divide foreign investor markets into segments which are easy to access. Companies seek to cross-list because they anticipate gaining from a lesser cost of capital. This arises because their stocks become more available to foreign investors. Their access to these stocks may otherwise be restricted due to international investment barriers.

3.      Investor protection:

Cross listing acts as a linking mechanism used by companies that are incorporated in a jurisdiction with reduced investor protection. These companies commit themselves willingly to higher standards of corporate governance. Investors will therefore feel safe to invest in these companies because their investments are protected.

v  Challenges :

External Audits Require Global Coordination

A multinational company must comply with financial reporting obligations in many of the countries in which it has operations and activities, and it must prepare consolidated financial statements that include its financial transactions and events worldwide. Critical to a company’s compliance with these financial reporting obligations is the work of the company’s external auditor. Accordingly, an external audit firm must be able to conduct or coordinate the delivery of its audit services on a worldwide basis.

The largest of these audits are conducted or coordinated through global networks and other affiliations of individual firms. The individual firms are subject to jurisdiction-based ownership, licensing, registration, and other regulatory requirements, even as they draw on, for example, globally common technologies, tools, methodologies, training, and quality assurance monitoring.[11]

The auditor’s report for a company’s consolidated financial statements is typically signed by only one firm in the audit firm’s global network. For U.S.-listed companies, publicly available disclosure forms filed with the PCAOB enable investors and others to identify whether other firms, including firms affiliated through a global network, participated in the audit and, when certain thresholds are met, the extent of their participation.