Access to audit papers – state secrets – of mainland companies to help Hong Kong regulator’s investigations
- As mainland authorities consider audit papers as “state secrets” these lead to challenges in cross border investigations
- Financial Reporting Council’s MoU with unit of Ministry of Finance will help investigations in nine ongoing cases
Hong Kong’s accounting regulator will get access to audit papers of mainland companies, considered as “state secrets” in a landmark agreement, which will assist in nine ongoing investigations.
Under the memorandum of understanding between the Financial Reporting Council (FRC), the regulator for auditors of listed companies in Hong Kong and a unit of China’s Ministry of Finance, the FRC can request the ministry to get access to the auditor’s papers in the mainland to help with its investigations.
“Earlier we could not obtain audit papers kept with accounting firms in China, but now the MoU will allow us to request the Ministry of Finance for assistance in our investigations and help us in our disciplinary actions,” Kelvin Wong Tin-yau, chairman of FRC, said on Wednesday.
Regulators have been diligently working on a carrot and stick approach to improve Hong Kong’s standing as one of Asia’s leading stock markets. While market watchdog Securities and Futures Commission has come down heavily on errant investment banks and listed companies, bourse operator Hong Kong Exchanges and Clearing has gone all out in welcoming companies to list on its exchange with its largest ever reform in 25 years.
China’s state secret laws have a wide definition that extends to audit papers of accounting firms. This creates difficulties for Hong Kong regulators to conduct their investigations as many listed companies and in the city are from China, while their auditors maintain the documents on the mainland.
The SFC spent five years in a legal battle with accounting firm EY before it could get the auditor’s working paper of its mainland clients in 2015.