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May 18, 2009

Hong Kong auditors see silver lining in audit changes

By Nicholas Moody

(FREE) Changes to simplify the audits of
listed companies in Hong Kong and Mainland China threaten to take a
chunk out of accounting firms’ bottom lines, although other
proposals could present a major new revenue stream, according to
two Hong Kong auditors.

The fee threat has arisen since the Chinese
Ministry of Finance (MoF) hinted it would allow companies listed on
both the Hong Kong Stock Exchange (HKSE) and the Shanghai Stock
Exchange (SSE) to prepare only one set of audited accounts.

BDO Hong Kong managing partner Albert Au said
the change will mean a “chunk of work” will disappear, which will
have an adverse impact on firms in Hong Kong, as public companies
listed in both capital markets reduce their Hong Kong Financial
Reporting Standards (HKFRS) compliant audits.

This follows a process of convergence that has
been going on since a series of joint declarations were signed in
December 2007 between the MoF and the Hong Kong Institute of
Certified Public Accountants (HKICPA).

Aligning standards

The MoF declarations stated that
Chinese accounting standards, Accounting Standard for Business
Enterprise (ASBE), had converged with HKFRS, in essence implying
that Chinese standards were in compliance with IFRS. A parallel
process has also happened with Chinese and Hong Kong auditing
standards.

The decision effectively means that companies
listed in both the Mainland and Hong Kong do not need financial
statements prepared under HKFRS, reducing the need for Hong Kong
CPAs to prepare statements.

Au, who was involved in deliberations with the
MoF as the immediate past president of the HKICPA, sees Big Four
firms being hit especially hard as they carry out the majority of
audit work for Hong Kong listed firms.

He said there are also implications for
investors and regulators, specifically around the audit quality of
domestic Mainland firms and resolving cross-border enforcement of
regulations on listed companies.

But there could also be opportunities for
firms, especially the mid-tier, to provide what Au calls
‘gate-keeping’ duties, which include audit control oversight.

“It would create a win-win situation. [We
could] provide audit quality control of mainland counterparts,” he
said.

“This will work as we belong to the same BDO
network of member firms, we can ensure audit quality and compliance
with local listing rules through this gate-keeping role.”

KPMG Hong Kong audit partner Jack Chow
acknowledged there will be a drop in fees as his firm audits about
80 public companies out of about 300 on the HKSE.

However, a recent announcement by Chinese
Vice-Premier Wang Qishan could provide a boost to the profession,
he said.

Qishan announced earlier this month that the
Chinese government will allow certain foreign companies to list on
the SSE, although did not indicate when this will happen.

Hong Kong and Chinese accounting firms are
expected to benefit enormously from the policy change as they will
derive significant new business helping foreign multinational
companies prepare to list on the SSE.

Chow said the change will make a substantial
difference to future clients although he could not estimate how
much the new listing work would be worth.

“You can see a smile on my face. Previously we
contacted our major multinational clients and they indicated their
interest to be listed on the SSE, so the volume could be quite
substantial,” he said.

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