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Accounting and auditing
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Exclusive | ‘State secrets’ no more: Hong Kong regulator gains access to HKEX-listed Chinese firms’ audit papers in breakthrough

  • Breakthrough could also serve as a template for cooperation between US and Chinese accounting and auditing regulators
  • Papers of seven Hong Kong-listed Chinese companies passed on to Financial Reporting Council after being vetted for national security purposes

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It is very important for the Financial Reporting Council to be able to access audit papers, because of the large number of companies with Chinese operations listed in Hong Kong, its CEO says. Photo: AFP
Enoch Yiu

Hong Kong’s accounting watchdog agency has gained access to the audit papers of Chinese companies listed on the city’s stock exchange for the first time, in a breakthrough that may serve as a template for cooperation between the financial regulators of the United States and China.

The Supervision and Evaluation Bureau of China’s finance ministry passed the auditors’ working papers of seven companies on Friday to the Financial Reporting Council (FRC), which oversees the auditing of companies listed in Hong Kong. The papers of another four companies – hitherto regarded as “state secrets” by Chinese authorities – would be handed over soon, the FRC said.

“This is a landmark moment for cross-border cooperation in the investigation of auditing irregularities,” the FRC’s chairman Kelvin Wong Tin-yau said in an interview with South China Morning Post. “It will enhance the corporate governance of the Hong Kong stock market.”

China’s broadly defined laws on state secrets extend to companies’ audit papers, forcing auditors to adhere to a 2015 edict by the finance ministry for such documents to remain on the country’s shores.

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The lack of access to these audits in Hong Kong and the US – where thousands of China-domiciled companies are listed – escalated into retaliatory disputes after Luckin Coffee’s accounting fraud, leading the US House of Representatives to pass a law last week to force US-listed Chinese companies to open their audits to an US accounting oversight body.
Marek Grabowski, the Financial Reporting Council’s chief executive, and Kelvin Wong, its chairman. Photo: K.Y. Cheng
Marek Grabowski, the Financial Reporting Council’s chief executive, and Kelvin Wong, its chairman. Photo: K.Y. Cheng
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The FRC has worked with the Chinese finance ministry for several years to resolve the issue and signed an agreement last year. While Beijing has not relaxed its state secrets laws, it has passed the papers on to the FRC after the required clearances were obtained from the relevant authorities, including the state secrets bureau, which confirmed that the audit papers did not contain materials that were state secrets, Wong said.

Access to the audit papers shows that Chinese regulators were willing to work with overseas regulators, Wong said.

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