White Collar

State secrets law hurts credibility of mainland firms

More transparency is needed to boost investor confidence in mainland-listed firms

PUBLISHED : Monday, 16 June, 2014, 11:55am
UPDATED : Tuesday, 17 June, 2014, 4:45am

Last week, the Ministry of Finance clarified how auditors can comply with the rules relating to state secrets, but this has failed to quell their concerns.

Unlike other countries, where only sensitive information about national security is treated as a state secret, China includes in its Protection of State Secrets Law a wide range of information that, if leaked, would supposedly hurt the national interest.

The list is long. It ranges from macroeconomic data to examination papers or whether the prospects for the year's harvest are good. Auditors' working notes are included, and a breach could lead to a fine or jail time.

In September, the Big Four global accounting firms will need to submit a joint affidavit to the United States securities regulator in an appeal against a US court ruling in January. The court banned their units in mainland China from practising in the US for six months after the firms refused to provide their audit papers to the regulator, saying they had to comply with China's secrets law.

Last month, a Hong Kong court ruled in favour of the Securities and Futures Commission in a legal battle with EY, saying the Big Four accounting firm could not use state secrets as a blanket excuse for not handing audit papers to the commission in its probe of a mainland company.

The court ruled that not all audit papers were state secrets and only those that contained state secrets were banned from being removed from the mainland.

The Ministry of Finance officials who visited Hong Kong last week discussed the state secret issue with the local government and accountants and shared a similar view.

But that has not solved the auditors' problem in proving whether audit papers contain state secrets.

Under the mainland law, anyone who is uncertain whether a piece of information is a state secret can submit the information or document to the National Bureau of State Secrets or one of its branch bureaus to confirm its status.

However, since all auditors have confidentiality agreements with their clients, they cannot take audit papers to the bureau without their clients' consent.

Furthermore, the criteria the bureau uses to decide whether something is a state secret are unknown. So it remains possible for companies to use state secrets as an excuse not to co-operate with an investigation by an overseas regulator.

If the mainland wants to encourage international investors to trade in A shares through the stock connect scheme linking the Hong Kong and Shanghai exchanges from October, it should make its state secrets law more transparent.

Otherwise, it will be hard to overcome foreign investors' scepticism about the accounts of mainland-listed companies.