China firms listing abroad may be forced to use mainland auditors

Chinese firms looking to list overseas, such as e-commerce giant Alibaba, could soon be forced to use only mainland auditors - a move that will help keep strategic information within the country.

Under proposed rules by China's Ministry of Finance, Hong Kong and overseas accountants will be banned from auditing mainland companies that want to raise capital in markets such as the United States and Hong Kong.

The ministry also intends to strictly enforce a ban on any movement of accountants' working papers out of the mainland.

The proposals, posted on the ministry's website in April, come as the US and China trade accusations of corporate cyberspying.

If they take effect, it means that Chinese companies like Alibaba, now using Hong Kong PwC, will have to switch auditors - possibly to PwC's mainland affiliate.

This lowers the likelihood of an auditor being forced by overseas courts to turn over records.

Last month, accounting giant Ernst & Young in Hong Kong was ordered by a city judge to share its paperwork for a mainland water treatment firm with the local regulator, despite its argument that these are state secrets under China's laws. The documents were brought to Hong Kong.

The plans have caused jitters among Hong Kong's accountants. If the changes occur, they could seriously hurt the city's financial services industry, say some.

Mr Clement Chan, president of the Hong Kong Institute of Certified Public Accountants (HKICPA), says the city's accountants will be hit "significantly".

There are some 30,000 accountants in Hong Kong; they can travel to China to do audit work on a temporary basis.

But with the proposed new rules, they can no longer do so, unless they live in China and are hired by the local affiliates of the major accounting firms. The Finance Ministry has released a list of 100 approved mainland firms qualified to carry out audits.

The hope is that some form of compromise will be found when Chinese officials visit Hong Kong next week for a meeting with the stakeholders here.

Mr Chan says a key worry appears to be over Hong Kong accountants taking their working notes with them when they return to the city. What he aims to propose is to find a way for these Hong Kong firms to store the documents on the mainland.

For the "Big Four" and other big players with mainland affiliates, there is less worry, says Mr Keith Pogson, a former president of HKICPA.

But the broader question of how Chinese firms can raise capital from overseas investors without fully opening their books for inspection remains.

Chinese regulators say they will let redacted paperwork leave the country. But it is unclear how this will work, given the broad and vague definition of "state secrets" in China.

In the US, regulators are at an impasse with their Chinese counterparts, notes Mr Chan. The US authorities insist that auditors registered with its Public Company Accounting Oversight Board be willing to open up their work papers for inspection, if need be.

For now, says Mr Pogson: "We have not seen an unwillingness in the US to allow mainland companies to list because of this." American regulators are taking a "pragmatic approach", he notes, adding, however: "Will Chinese companies be willing to list in the mainland instead? We are not sure where the power within the relationship lies."

xueying@sph.com.sg

This article was first published on June 7, 2014.
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