Hong Kong Gets Chinese Audit Papers the U.S. Is Demanding

(Bloomberg) — Hong Kong received the first access to financial audits from companies on the Chinese mainland, an issue that has vexed relations between the U.S. and China and threatens to lead to the delisting in New York of giants such as Alibaba Group Holding Ltd.

As part of a 2019 understanding with the Chinese Finance Ministry, the Hong Kong Financial Reporting Council obtained the first batch of audit papers from the mainland, becoming the first offshore regulator to break through the state secrecy barrier.

Access to such documents has been a hot-button issue between China and the U.S. for more than a decade. China so far has refused to let inspectors from the American Public Company Accounting Oversight Board review audits of Chinese companies that trade on U.S. markets.

That in turn led U.S. lawmakers to pass legislation this month to delist Chinese companies if access continues to be denied, while China has said it’s willing to work through the problem with the incoming Biden administration. The turmoil has already prompted a number of U.S.-listed Chinese companies to also start trading in Hong Kong, and regulators in the Asian financial hub say the audit access should be reassuring for investors.

“If the companies that may leave the U.S. markets come to Hong Kong, then, yes, we’re confident that we will be able to carry out our regulatory functions in relation to those entities,” Marek Grabowski, the new chief executive officer of the city’s Financial Reporting Council (FRC), said Wednesday in an interview.

Some 220 Chinese companies worth about $2 trillion are at risk of being forced to leave the U.S. market, including giants like Alibaba and Baidu Inc. Since 2009, companies based in the Chinese mainland have been forbidden to transfer accounting records, including audit working papers, offshore without the consent of authorities due to state secrecy concerns.

FRC, the regulator for auditors of Hong Kong-listed companies, has made requests for 11 investigations so far and received seven. In the next stage, it plans to demand access to working papers for inspection, Grabowski said.

Grabowski came to Hong Kong in October after serving 10 years at the U.K. Financial Reporting Council as the director of audit policy and after another decade with the International Auditing and Assurance Standards Board.

In the same interview, FRC Chairman Kelvin Wong said the agreement has so far worked well and could be replicated elsewhere.

It’s an agreement that the Chinese Finance Ministry “is willing to enter into with any other overseas financial regulator,” Wong said. “It’s up to any foreign financial regulators to consider whether they would like to enter into such agreement.”

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