Beijing could do worse than follow Hong Kong's market rules

PUBLISHED : Wednesday, 28 May, 2014, 4:28am
UPDATED : Wednesday, 28 May, 2014, 12:37pm

If Beijing looks to the private sector to perform more of the heavy lifting in growing China's economy, it can do without uncertainty or lack of confidence in the minds of investors. Beijing's newly revealed proposal to impose severe restrictions on the role of international accountants in auditing mainland companies listing in Hong Kong or overseas is not helpful in that regard. Mainland finance officials should take time to think again about the new auditing rules before ending a brief consultation by the end of this month and introducing the changes before the end of the year. A landmark ruling on Friday by a Hong Kong court should prompt them to do so.

The case involved an existing requirement - reinforced by the new rules - that accountants must follow the country's secrecy laws and not pass on any information to overseas regulators or exchanges. Accounting firm Ernst & Young sought to rely on this requirement in refusing to hand over information to the city's Securities and Futures Commission relating to listing candidate Standard Water. But the Court of First Instance rejected the argument, saying mainland law did not impose a blanket prohibition and the firm could not prove that information withheld contained state secrets.

When companies sell shares in new listings on Hong Kong and overseas stock exchanges, investors rely on audits by international firms for assurances that the books are clean.

Under the proposed new auditing rules, international accounting firms are to be barred from sending their staff to audit a mainland company. Instead, they are required to team up with local accounting firms so that the domestic partners' accountants do the auditing. This turns back the clock 20 years, just when people already have reason to doubt the credibility of audits done on the mainland, even with involvement of mainland units of the Big Four international accounting firms. And it will no longer be possible to send an accountant from Hong Kong to vet a mainland audit.

This is not the first time Hong Kong's market regulator has felt compelled to intervene after the state secrets law was invoked to prevent the disclosure of information by mainland companies material to investment decisions. The SFC deserves support. If dodgy companies can hide behind the state secrets law, that can only harm the interests of shareholders and the image of Hong Kong as a capital market. Moreover, if Beijing is serious about increasing transparency and fighting corruption it could do worse than follow Hong Kong's market rules.