The Hong Kong Institute of Certified Public Accountants (HKICPA) has taken a cautious approach to the consultation launched by the Chinese Ministry of Finance (MOF), which aims at preventing foreign auditors from auditing Mainland Chinese companies.
HKICPA told The Accountant that its response so far focused on alerting firms and professional bodies, informing the Hong Kong Government, as well as tracking responses from other jurisdictions that could be affected by the proposed ban.
"The proposals would have far-reaching business and regulatory consequences on the Hong Kong accounting profession and financial market," HKICPA said.
HKICPA added that access to working papers prepared by Mainland CPA firms "would become a bigger issue" in clear reference to Chinese authorities’ reluctance to co-operate with foreign regulators on cross-border audit inspections.
If the proposals are passed into law, Hong Kong and overseas CPA practices would have to partner with one of the top 100 China CPA practices in order to carry out audits for overseas-listed Chinese enterprises.
It would also affect overseas-listed companies, irrespective of their place of incorporation, with operating entities in China.
In particular, HKICPA said the proposals would affect the foreign auditors of all red chip and H-share companies that do not engage a local partner firm.
Red chip companies are enterprises that are incorporated outside of the Mainland, controlled by Mainland Government entities and listed on the Hong Kong Stock Exchange.
H-share companies are companies incorporated in Mainland China and whose listings in Hong Kong are approved by the China Securities Regulatory Commission.
Up to now international and non-Mainland firms could apply for a temporary audit practice certificate to enter Mainland China. But Peking University professor of practice Paul Gillis wrote on is blog dedicated to accounting in China, that this rule was often overlooked by firms.
The proposed rules would abolish the current system of provisional license arrangements.
"The problem has become prominent as some non-Mainland CPA practices violate the rules and perform audit services in China, while some Mainland and non-Mainland CPA practices conclude that their cooperation arrangements show ambiguity or uncertainty in their rights and responsibilities," HKICPA said.
According to MOF’s proposals Hong Kong and overseas auditors would take full responsibility for the audits, and audit reports, issued by them and these reports would have no legal effect in China.
If they violate the rules by conducting audit work in China, foreign firms would be asked to stop and be referred to their home country regulators, the MOF’s consultation proposed.
MOF’s consultation stated the proposed rules were an effort to establish a sound regulatory regime for firms carrying out cross-border audit services.