Hong Kong accounting firms will need to diversify out of their dependence on auditing revenues after a rule change that relieves mainland companies from an obligation to use their services.
Auditing now represents more than 60 per cent of all accounting firms' business, a dominant contribution due in part to a stock- exchange regulation that required mainland companies seeking initial public offerings on the local market to appoint Hong Kong-based accounting firms to act as listing auditors as well as conduct annual audits after their listings.
But effective last month, the rule was changed, and the 164 Hong Kong-listed H-share companies no longer need to hire Hong Kong firms to do their annual audits, if their books are audited by a mainland firm. The mainland auditor must be among a list of 12 firms approved by the Ministry of Finance.
So far only Tsingtao Brewery has decided to use only a mainland auditor to audit its books. Other big players, such as the Industrial and Commercial Bank of China, the Bank of Communications and China Life, have not yet announced whether they plan to use only a mainland auditor.
'I do not think all 164 mainland firms will change to mainland auditors immediately, as some would like to take a wait-and-see approach to see how international investors respond to the new rule,' said Hong Kong Institute of Certified Public Accountants president Philip Tsai Wing-chung.
HKICPA is the regulator responsible for licensing the 32,000 accountancy firms in the city.
Even after the rule change, mainland firms may choose to continue using Hong Kong auditors, Tsai said, since Hong Kong accounting standards and audit practices are familiar to international investors.
'But it would be inevitable that some mainland firms may choose to hire mainland auditors later on. As a result, we are going to see some loss of auditing business.
'But while the auditing pie is going to be eroded, this should not be a problem,' Tsai said. 'Now is the time for accounting firms to diversify to more sophisticated services such as company business restructuring, insolvency, risk management and compliance, and consultancy services on acquisitions, mergers and taxation.'
In the United States, Tsai said, auditing contributed only about 30 per cent of accounting firms' revenue, while such consultancy services contributed the rest.
'Judging by the experience in the US, which is the largest accounting market worldwide, firms can do well by doing a diverse range of business. This is the direction that the Hong Kong accounting firms would go for,' Tsai said.
As a result of the rule change, the 64 H-share companies now dually listed in Hong Kong and Shanghai - including major players such as the Industrial and Commercial Bank of China and China Life Insurance - can choose to issue only one set of financial statements according to the mainland accounting standards, for both Hong Kong and mainland investors.
This replaces a requirement for two sets of statements, one based on Hong Kong accounting rules, which follow international standards, and a second set based on mainland accounting standards.
A further 100 H-share companies that are listed in Hong Kong but not on the mainland can also switch to mainland accounting standards instead of Hong Kong standards if they choose to do so. They may also choose to hire mainland auditors.
Tsai said that since the 12 firms listed by the Ministry of Finance included joint ventures of the Big Four international accounting firms, the result might be that the accounting firms will simply shift responsibilities for the audits from their Hong Kong offices to their mainland joint ventures.
Hong Kong accounting firms will also benefit from the new rule because it will be reciprocal, allowing Hong Kong companies that choose to list on the mainland in future to opt for Hong Kong accounting standards and auditors.
'Although there are no Hong Kong firms listed on the mainland at present, this will change in future when the mainland introduces an international board for foreign firms to list,' Tsai said.
The changed rule has not led to accounting firms reducing their hires, and according to Tsai most firms hired 10 to 20 per cent more new staff this year. Deloitte Touche Tohmatsu, where Tsai is a partner, plans to hire 300 new graduates this year, up from 250 last year.
'The economic recovery has led to more IPOs and mergers and acquisitions. Some companies are setting up new businesses. This has prompted accounting firms to increase their hires,' Tsai said.
Held to account
A new auditing rule regarding H shares may force firms to diversify
Auditing represents more than this percentage of Hong Kong accounting firms' business: 60%