The stock exchange has proposed allowing mainland companies listed in Hong Kong to submit their accounts using cross-border audit firms and accounting standards. The move could save mainland corporations millions of dollars. At present mainland listed-companies must use Hong Kong auditors for their annual accounts. The burden of double audits can be costly and time consuming. According to their annual reports, Industrial and Commercial Bank of China paid up to 163 million yuan (HK$185.07 million) in 2007 for its domestic and Hong Kong audits, and PetroChina spent almost 120 million yuan in 2007 for its two audits. In a reciprocal move, Hong Kong companies listed in Shanghai or Shenzhen will be permitted to retain their Hong Kong auditors and use Hong Kong accounting and auditing standards. The proposal will abolish the existing double audit requirement for H-share firms. The proposal is a joint effort based on input from the Financial Services and the Treasury Bureau, the Securities and Futures Commission, the Financial Reporting Council, the Hong Kong Institute of Certified Public Accountants (HKICPA), the Stock Exchange of Hong Kong, and the mainland's Ministry of Finance (MoF) and China Securities Regulatory Commission (CSRC). But it is being driven by the mainland authorities' desire to internationalise their accountancy practices, according to Jack Chow, an audit partner at KPMG China. 'The mainland has already moved to convert its accounting and auditing standards to international standards. The regulators now want to see their major accounting firms up their stakes in international capital markets,' he said. Joint declarations in recent years between the HKICPA and the China Accounting Standards Committee have seen agreements that substantially converge the accounting standards of both jurisdictions, and financial statements prepared under mainland accounting standards are equal to financial statements prepared under Hong Kong standards. According to accountancy functional constituency legislator Paul Chan Mo-po, mainland accounting and auditing standards are practically converged with international standards to the point where there are no material differences between them. He said that under existing rules, the Hong Kong stock exchange permitted listed companies from outside Hong Kong to have their accounts prepared under the accounting standards of their own jurisdiction. 'Waivers have been given to other listed companies. For example, HSBC is not signed off by KPMG in Hong Kong but by KPMG in London. In these circumstances, it is hard to argue against allowing mainland audit firms to audit mainland registered companies' accounts,' he said. There are almost 7,000 accounting firms on the mainland but less than 70 of them are endorsed by the MoF and CSRC to carry out listed company audits. The mainland accounting firms that will be approved to carry out H-share audits have not yet been announced but it seems likely that fewer than 10 - including the local offices of the multinational Big Four - will be certified. The stock exchange proposal has been in the pipeline for many months. Reports in mainland media a year ago stated that the country was preparing to put an end to the double audit requirement for H-share companies. The requirement for separate audits for dual-listed financial companies and firms trading in the B-share market was cancelled at the end of 2007. About 60 mainland firms listed in Hong Kong and Shanghai are obliged to separately report their quarterly, interim or full-year financial results according to the two sets of standards. A-share listed companies must be audited by a CPA firm registered on the mainland and H-share companies must be audited by a CPA firm registered in Hong Kong. The Hong Kong stock exchange proposal stated that submitting accounts under one set of accounting rules should reduce compliance costs for mainland incorporated issuers, promote more timely disclosure of information to investors and increase market efficiency. Andrew Lam, partner at Grant Thornton Hong Kong, said that the new regime could be an improvement in these terms. 'An annual report with two sets of accounts takes more time to prepare and is also more costly. For investors, from the perspective of timeliness of receipt of financial information, one set of financial statements instead of two and access to the information in a more timely manner are big benefits,' he said. However, there are concerns about the proposal because although the words in the reporting and auditing standards in Hong Kong and the mainland are the same, their implementation and interpretation may lead to differences. Chow said: 'There's a lack of experience on the mainland in the implementation of international standards. 'The mainland regulators recently issued a report about the first year of application of the new international standards. They highlighted areas where there are certain misinterpretations. Our hope is that they are going to strengthen and enhance the practitioners in their understanding of the new standards.' Among other concerns about the implications of the proposal are fears of pressure on Hong Kong audit fees and how the system will be policed. Lam said that there was a practical difficulty because of the 'one country two legal systems' framework. 'The suggestion is for two separate sets of regulators regulating two sets of professionals,' he said. 'Theoretically, it's possible but in practice there may be some operational issues that need to be handled. These issues may have to be ironed out as and when they appear - sometimes it's hard to anticipate what they will be.' Chan said that the arrival of mainland accounting firms in the market would see keen competition and fee pressure on all audit firms in the short term until such time as the market could differentiate between the firms and pay them appropriately. 'What is important is that Hong Kong is involved in the process to make sure that the mainland firms have sufficiently high standards and that the quality of their internal controls is of a high standard,' he said. 'In the event of audit failures or accounting errors there should be a mechanism to allow a proper investigation into the matter.' Parties have until October 23 to comment on the proposal. If the market gives its general approval, changes could take effect as early as January.
