Listed companies in both Hong Kong and the mainland will be able to save millions of dollars in fees if a new arrangement takes effect The convergence of mainland accounting and auditing standards with international accounting and auditing standards means that A- and H-share companies in Hong Kong and the mainland may save millions of dollars in auditing fees should the double audit requirement be abolished. All A- and H-share dual-listed companies must separately report their quarterly, interim or full-year financial results under Chinese Accounting Standards (CAS) and Hong Kong Financial Reporting Standards (HKFRS). The financial statements for A-share companies have to be prepared under CAS and then audited by a firm of Chinese certified public accountants (CPAs) using the same standards. The financial statements for the H-share companies have to be prepared under the International Financial Reporting Standards and audited by a firm of Hong Kong CPAs using either the Hong Kong or international auditing standards. In addition, as the shares are listed on different stock exchanges, they have to follow or comply with either the mainland or Hong Kong exchange listing rules. With the number of companies listed on the mainland and Hong Kong close to 60, the burden of double audits in terms of time and cost is onerous. According to their annual reports, for example, Industrial and Commercial Bank of China (ICBC) paid about 160 million yuan (HK$182.6 million) last year for its domestic and Hong Kong audits, and PetroChina spent almost 120 million yuan last year for its double audits. The mainland cancelled its requirement for separate audits for dual-listed financial companies and firms trading in the B-share market at the end of last year. But the A- and H-share requirement may be harder to shake, largely because of the geographical limitations of the regulators on either side of the border. Right now, accounting firms on the mainland are supervised by the China Securities Regulatory Commission, the Ministry of Finance, tax bureaus, and audit regulatory bodies. These regulators cannot supervise firms in Hong Kong, nor can Hong Kong regulators supervise firms on the mainland. 'With a single audit requirement there would need to be some sort of agreement between the Hong Kong and mainland regulators,' said Richard Ho, president of CPA Australia's, Hong Kong, China division. 'For argument's sake, if the issuer employed a Hong Kong firm to do the audit then the mainland regulator would have problems in discharging its regulatory supervisory duties because the firm is in Hong Kong and they don't have the power to investigate here. So there must be some sort of understanding between the Hong Kong and mainland regulators before a single audit requirement can be implemented,' he said. That said, there have been several joint declarations by the Hong Kong Institute of Certified Public Accountants (HKICPA) and the China Accounting Standards Committee (CASC) that have also fuelled the idea that the double audit requirement may soon fall. Both bodies have agreed to 'resolve as soon as possible, acceptance by the regulators of one jurisdiction for the purpose of listing in that jurisdiction, the financial statements of an enterprise of the other jurisdiction that are prepared under the accounting standards of that other jurisdiction and audited by eligible auditing practices in that other jurisdiction applying auditing standards of that other jurisdiction'. The auditing standards that China follows are very similar to the International Standards on Auditing (ISA) that are followed by Hong Kong. So while A-share companies must be audited by a CPA firm registered in China and H-share firms must be audited by a CPA firm registered in Hong Kong, both sets of audit opinions are based largely on the same standards and released roughly simultaneously. The HKICPA and its mainland counterpart, the Chinese Institute of Certified Public Accountants (CICPA), use the term 'substantially converged' to describe the status of Hong Kong and mainland accounting standards. But there are differences. Comparing the H-share financial statements of the same company with it's A-share financial statements will show discrepancies in terms of some bottom-line figures and balance sheet items. 'In most of the cases there are two audit firms to do the audit, so there are two firms involved in the audits of the same company and two different teams enter the company at roughly the same time, talk to the finance department and look into one set of books and records. You can see the problem there,' Mr Ho said. That said, Mr Ho is dubious that the double audit requirement will disappear any time soon. 'I know the HKICPA and CICPA are talking about getting rid of the double audits but I don't see it happening without sorting out this arrangement.'
