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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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