Hong Kong to Relay Concern to China over Auditing Ban Proposal

Hong Kong to Relay Concern to China over Auditing Ban Proposal

HONG KONG (MAY 29, 2014)


(Bloomberg) The Hong Kong government plans to meet Chinese officials to discuss concerns over a proposal to ban foreign accounting firms without a mainland partner from auditing Chinese companies planning to list overseas.

Hong Kong will “reflect the concerns of the industry,” Ka-Keung Chan, the secretary for financial services, told reporters yesterday, according to his spokeswoman Shirley Wong. The city’s delegates will meet Chinese finance ministry officials early next month, the South China Morning Post reported today, citing Chan.

China’s Ministry of Finance issued draft rules last month requiring foreign accounting companies to team up with one of the nation’s top 100 firms to perform audits of Chinese companies seeking to list overseas. They come in the wake of a series of short-selling incidents targeted at China-related businesses and amid a six-month U.S. ban on mainland firms auditing Chinese companies seeking an American listing.

The regulations aim to clarify the role of Chinese accounting firms unfairly blamed by foreign institutions, especially short sellers, whenever China-based companies are accused of fraud, the finance ministry said in an April 21 document.

Under Hong Kong’s listing rules, companies are required to hire local accountants to sign off on financial statements, and the new rules mean they won’t be able to do the audit by themselves, the Post reported Chan as saying. Relying on mainland staff members would lead global firms to scale back the hiring of Hong Kong’s professionals, the Post said.

Building Quality
The rules aim to promote business collaboration between local and foreign firms, while building up the quality and capabilities of Chinese practitioners, the finance ministry said in a separate statement explaining the rationale for the changes. Overseas firms will be responsible for issuing audit reports, which will have no legal binding in China and be held accountable for the auditing, it said.

Major international accounting firms such as Ernst & Young LLP, Deloitte LLP, PricewaterhouseCoopers LLP and KPMG LLP already operate in China through a local affiliate.
Under the proposed rules, both overseas and local firms and their clients must conform to a Chinese law prohibiting the transfer of data that might contain state secrets to foreign parties without government permission, the finance ministry said.

Ernst & Young was ordered by a Hong Kong judge on May 23 to give the city’s Securities and Futures Commission audit papers for a Chinese water treatment company that the accounting firm said it couldn’t because it was prevented by Chinese secrecy laws.

Fieldwork Pretext
The Ministry of Finance’s draft rules stipulate that auditing services for “foreign-registered, China-based companies” will no longer be considered a temporary practice—a pretext often used by overseas accounting firms to carry out fieldwork in the country, it said.

The proposals cover audits of listing documents and regular financial statements of Chinese companies after their initial public offerings, according to the draft rules, which are under consultation until tomorrow.

Deloitte, Ernst & Young, KMPG and PricewaterhouseCoopers’ Chinese affiliates have been temporarily barred from leading audits of U.S.-listed companies after they refused to hand the Securities and Exchange Commission documents relating to Chinese operations, citing Chinese law.


About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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