Hong Kong, Mainland Regulators Resolve Impasse on Audit Papers
A memorandum of understanding signed by Hong Kong and mainland authorities will allow the city’s regulator to gain access to audit papers on the mainland.
The cross-boundary collaboration marks a step toward resolving a long-running tussle between the mainland and overseas regulators on inspecting the audit work on foreign-listed Chinese companies.
The memorandum, signed Wednesday by the Supervision and Evaluation Bureau of the Ministry of Finance and the Hong Kong Financial Reporting Council, aims to enhance the quality and reliability of listed entities’ audits and reinforce Hong Kong’s position as an international financial center, the Hong Kong regulator said in a press release.
In the future, the Hong Kong Financial Reporting Council will be able to make requests to the mainland regulator for assistance in gaining access to audit working papers of Hong Kong audit firms located on the mainland, according to the accord.
Because of China’s confidentiality policies, Hong Kong and global accounting firms in the past were not allowed to transmit audit documents located on the mainland abroad, making it difficult for foreign regulators to inspect public companies listed on their markets.
In 2009, China’s top securities regulator, the National Administration of State Secrets Protection, and the National Archives Administration issued a notice barring all working documents in relation to the overseas listings of Chinese companies from being transmitted abroad to prevent inadvertent disclosure of state secrets.
A 2015 rule issued by China’s Finance Ministry further required that all auditing documents on overseas listed Chinese companies be kept on the mainland.
The situation has trapped auditors between violating mainland law and risking offshore legal challenges. Major global accounting firms have faced legal proceedings outside the mainland for failure to submit audit papers to regulators.
In 2012, Hong Kong’s Securities and Futures Commission brought charges against Ernst & Young’s Hong Kong unit for failure to provide accounting records in relation to the regulator’s investigation of a 2009 failed initial public offering of Chinese waste management company, Standard Water Ltd.
Ernst & Young argued that it did not possess the relevant records as they were held by its mainland unit. A Hong Kong High Court judge ruled against the accounting firm in a major blow to the accounting industry in Hong Kong.
The U.S. Securities and Exchange Commission has taken up a similar case, charging Chinese affiliates of “Big Four” accountancies with securities violations for failure to produce documents related to audits they conducted of nine Chinese companies.
Since then, the mainland and Hong Kong regulators have gone through several years of negotiations, trying to remove the restriction on getting access to mainland companies’ audit papers.
As of the end of March, the Hong Kong Financial Reporting Council had made nine requests to the Finance Ministry to review audit papers, said Kelvin Wong, chairman of the council. Without the new accord, it would be impossible to get permission from the mainland regulator to review those papers, he said.
Wincey Lam, chief executive of the Financial Reporting Council, said she expects the Finance Ministry to provide the audit documents this year.
Lam said the memorandum applies only to collaboration between the Supervision and Evaluation Bureau of the Ministry of Finance and the Hong Kong Financial Reporting Council. Upon obtaining documents, the HK regulator is not allowed to transfer the papers to any third parties, including the HK securities regulator, under the agreement.
Gao Jinxing, director of the Supervision and Evaluation Bureau of the Ministry of Finance, said the ministry is keeping in close communication with U.S. regulators and will fully consider their needs in compliance with China’s laws.
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