Hong Kong Stock Exchange Allows Mainland Auditors to Submit Financial Statements
Dec. 13 – The Hong Kong Exchanges and Clearing Limited (HKEx), operator of the local stock exchange, said on Friday it will allow locally-listed mainland firms to file financial statements to mainland auditors in accordance with their accounting standards from December 15 this year.
Under the new framework, a joint move by regulatory bodies on the mainland and in Hong Kong, A and H share companies listed on both the mainland and in Hong Kong may now choose to prepare one set of financial statements based on mainland accounting rules, rather than two sets of financial reports based on rules adopted by the two jurisdictions as currently practiced.
“The framework was developed based on mutual recognition. This is expected to increase market efficiency and reduce compliance costs of mainland incorporated companies listed in Hong Kong,” said Mark Dickens, HKEx’s head of listing.
The Ministry of Finance released a list of 12 accounting firms that are qualified to provide auditing services for Hong Kong-listed mainland companies, including the China operations of the Big Four. The MOF set very tough criteria for these auditors according to Chris Joy, executive director at the Hong Kong Institute of Certified Public Accountants, including requiring that they have an association with a Hong Kong accounting firm.
The full requirements, issued by the MoF last year, are:
- The CPA firm must hold related security and futures qualifications; if either engaged in a H-share audit or is expected to have the ability to audit a H-share company
- Total firm revenue from the previous year exceeds RMB300 million (US$44 million), of which revenue from auditing service must exceed RMB200 million (US$30 million) and security related revenue exceeds RMB50 million (US$7.3 million). Otherwise, it must have more than 30 listed companies as clients
- The number of its employees who hold a CPA title should be more than 400
- Ownership of individual shareholders or individual partners should be less than 25 percent
- It has effective corporate governance, quality controls and internal controls
- It has an affiliated office in Hong Kong or it is one of the member offices of an international CPA firm which has offices in Hong Kong
China has been wanting to develop the capabilities of mainland accounting firms to international standards, and these criteria dictate they are on the way to accomplishing this.
“The Chinese want to demonstrate international standards so the criteria are quite stringent,” he said. The company responsible may also make the decision to choose the auditor, meaning the system encourages a self-regulatory approach. “If the company wants its potential investors to feel comfortable, it will select a reputable firm.”
Winnie Cheung, chief executive and registrar at the Hong Kong Institute of Certified Public Accountants, said that through on-going convergence over the past three years, the differences between accounting standards adopted by the two jurisdictions are becoming insignificant.
Currently there are 64 A and H share mainland companies and around 100 H-share-only mainland companies listed on the Hong Kong bourse. According to Cheung, the 12 qualified mainland accounting firms, together with their Hong Kong affiliated practices, audit nearly 90 percent of all H-share financial statements and nearly 85 percent of all A-share financial statements of the A and H share companies. She thinks the impact on the local accounting community will thus be limited.
Cheung said given the option of dropping one set of financial reports, mainland companies will very likely maintain their mainland version as it is statutory on the mainland. However, she emphasized that lower compliance costs will prompt more mainland companies to list in Hong Kong, where IPOs and further fundraising activities will boost demand for local accounting services.
Meanwhile, according to HKEx, the new framework is a reciprocal arrangement, which will allow Hong Kong companies listed on the mainland to prepare their financial statements using Hong Kong accounting standards and Hong Kong accounting firms. However, the “international board,” the planned mainland equity platform for foreign-incorporated companies, is not in existence yet. Cheung said once that door is opened, there will be a large potential market for Hong Kong accounting firms.
“There will be some criticism over this,” says Chris Devonshire-Ellis, principal of Dezan Shira & Associates. “However, I see little cause for alarm. The A and H share listings have already been audited in the main by the firms chosen by the MoF, and at this level, the HKICPA will have had to have been very satisfied at the level of competency. After all, they have Hong Kong’s reputation of transparency to protect. It will also allow, in time, Hong Kong accounting firms to practice in mainland China, which is another way in which mid-level Chinese firms can learn to be more competitive and professional in their services. Problems with the professional services industry in China tend to exist at the lower-medium range, and not with the well established firms with finance and experience behind them. Overall, it’s a positive development that will lead to improvements in mainland Chinese audit and compliance standards.”
- Previous Article Enterprises Can Enjoy Tax Deductions by Recruiting the Unemployed
- Next Article End of 2010 – Time to Upgrade Your RO to a WFOE