Access to audit papers – state secrets – of mainland companies to help Hong Kong regulator’s investigations

Enoch Yiu
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Access to audit papers – state secrets – of mainland companies to help Hong Kong regulator’s investigations

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.

Can Hong Kong’s carrot and stick approach prove effective in improving stock market quality?

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.

EY had refused to comply with the SFC request, citing “state secret” laws but a Hong Kong court ruled in the regulator’s favour.

The Ministry of Finance in Beijing in 2015 reiterated that accounting papers could not be taken out of the mainland and auditors needed to adhere to state secret laws.

“The state secret laws are still there but the MoU has established a clear procedure on how the FRC can request the Ministry of Finance to access to these audit papers in the mainland. This is important to our investigations,” Wong said.

EY gives up appeal over state secret ruling

There are 730 mainland enterprises listed in Hong Kong, out of 2,353 in total. They represent 68 per cent of total market capitalisation in Hong Kong and 81 per cent of turnover, according to stock exchange data.

“The signing of the MoU will further strengthen the regulatory cooperation between the two places and deepen the audit regulatory equivalence of the mainland and Hong Kong,” said Gao Jinxing, director general of the Supervision and Evaluation Bureau of the Ministry of Finance.

Gao signed the MoU with Wincey Lam, acting chief executive of FRC, in Hong Kong.

“The cooperation goes deeper than the just the exchange of working papers. This is moving in the right direction and is the joint effort of regulators,” said Kenneth Leung, a Hong Kong lawmaker who represents the accountancy sector. “This really will help improve our regulatory environment.”

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Clement Chan Kam-wing, managing director of accounting firm BDO, said it is a good move to have the MOU but it may not solve all problems.

“We do not know how fast and how many working papers the Ministry of Finance unit can help to pass on to the FRC. If the FRC has a lot of requests for the Ministry of Finance unit to do the investigation, can the mainland regulator [ensure] enough workforce to handle it? The devil is in the details of how this cooperation will work smoothly,” Chan said.

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