Mainland audit rules benefit its accountants, not the country

Unless they know the books are clean, investors will think twice before buying mainland stocks

PUBLISHED : Tuesday, 27 May, 2014, 12:55am
UPDATED : Tuesday, 27 May, 2014, 12:55am

The Ministry of Finance's plan to ban overseas auditors from working on the mainland, in order to prevent their working notes being taken out of the country, is a move likely to cause more harm than good.

As the Post first reported last week, the ministry is consulting until the end of this week on the implementation of new rules later this year that would ban international accounting firms from working alone on the mainland for companies looking to list overseas, including Hong Kong and the US.

Instead, they will have to team up with one of 100 or so mainland accountancy firms and let the mainland partners' staff do all field audits.

While Beijing said the reform was aimed at clarifying the roles of international and mainland auditors, the real reasons for the move may be related to recent court cases and a push by international regulators for access to auditors' papers to aid their investigations of problematic listings.

On the mainland, a "state secret" can range from missile plans and politically sensitive information to grain harvest results, students' examination papers and auditors' working notes. It is therefore a crime for accountants to hand their handwritten notes or other data to overseas regulators, with a breach leading to a fine, imprisonment and potentially even capital punishment.

Overseas regulators and courts think differently. After a 22-month legal battle between the Securities and Futures Commission and accounting firm EY, Hong Kong's Court of First Instance ruled on Friday that EY could not use the state secret clause as a reason for withholding papers requested by the SFC.

In January, a US judge ruled that the mainland units of the "Big Four" accounting firms - PwC, KPMG, Deloitte and EY - should be suspended from practising in the US because they also cited state secrets in refusing to hand their working papers to the US regulator. The Big Four plan to appeal.

These ruling would not make Beijing feel comfortable, especially before mainland e-commerce giant Alibaba's planned listing in the US later this year. Alibaba has a lot of information about the mainland economy and individuals' spending patterns. That may explain the timing of the Ministry of Finance proposals. But while the rule changes will help Beijing better protect its "state secrets", mainland authorities should also reflect on what they will lose in the process.

If the rules are implemented in their current form, they would exclude young Hong Kong auditors from working on the mainland, limiting the country's talent pool.

International investors would also think twice before betting on mainland stocks listed overseas or investing in Shanghai when permitted to do so via the through train scheme beginning in October. Investors are not interested in state secrets; they just want to make money.

Before they bet their money on a mainland company, they want to have proof its books are clean. The Ministry of Finance proposals won't help.

Beijing wants to reform and modernise its economy and also wants Shanghai to become an international financial centre.

International accountants, with their networks and experience, have roles to play in these reforms. Cutting them off from the mainland will only benefit mainland accountants, not the country as a whole.