The Financial Reporting Council (FRC), which regulates the auditors of Hong Kong-listed companies, is in talks with Beijing’s Ministry of Finance (MOF) about allowing it to inspect the audit papers of mainland Chinese firms , its chairman said. Based on an agreement signed between the two bodies in 2019, the MOF has assisted the Financial Reporting Council in investigations of cases involving audit working papers located on the mainland. The mainland authority has already passed the papers from seven cases to the Hong Kong watchdog to carry out its inquiries. The two bodies are now exploring ways FRC staff could conduct cross-border inspections even in cases where there is no investigation under way. “These inspections [would] aim at checking if audit firms have sufficient internal controls on audit quality and whether auditors have exercised adequate professional scepticism in audit to check on the numbers on the books of their clients,” Kelvin Wong Tin-yau said in a media briefing about the annual work review of the FRC on Thursday. “This is important in ensuring the quality of the audit works of listed companies in Hong Kong.” China to bring down audit barrier in long-running US listing row Wong refused to say if the plan might enable Beijing to satisfy US demands to allow its audit regulator to inspect mainland Chinese firms. The Trump administration enacted the 2020 Holding Foreign Companies Accountable Act (HFCAA), which empowers regulators to expel US-listed foreign companies if they are deemed to be non-compliant with auditing inspection requests made by the US Public Company Accounting Oversight Board (PCAOB). That puts 261 Chinese companies valued at a combined US$1.4 trillion as of March 31 – including this newspaper’s owner Alibaba Group Holding and Li Ka-shing’s Hutchmed – at risk of possible delisting after three consecutive years of non-compliance, if a solution is not found to settle the dispute between the China Securities Regulatory Commission (CSRC) and the PCAOB. The earliest that such a delisting could take place is in October 2023. In April, the CSRC issued a draft rule scrapping a requirement that only Chinese regulators can conduct on-site audits of mainland companies listed overseas, a step that paves the way for finding a solution for the deadlock. But still no agreement has been made yet. “Since China does not allow its audit working papers to be taken outside the mainland, one possible solution is for the FRC or FCAOB staff to go to the mainland to do on-site inspections at the mainland accounting firms,” said Edmund Wong Chun-sek, a practising director at Patrick Wong CPA who also represents the accountancy constituency in the city’s legislature. “This will enhance the power of the FRC to fulfil its duty as an audit regulator if it can do the inspection of the mainland audit working papers, and hence strengthen confidence of the investors.” But Wong said even if the MOF were to reach agreement with the FRC, the same model might not be adopted between the CSRC and the PCAOB. “Hong Kong is part of China under One Country, Two Systems, while the US is another country with a tense relationship with the mainland,” he said. “The issue between the US and China is not just about auditing, but it is related to the worry of leaking state secrets or sensitive information about China to the US. It will be a much more complicated process for the PCAOB and CSRC to reach an agreement than it is for the FRC and the MOF.”