President’s message
Negotiations continuing
over cross-border audits
Dear members,
W
“We are watching
if this particular
case would have
any impact on
the provisional
regulations and
other areas of
our work.”
e will be meeting representatives of the Chinese Ministry
of Finance later this month to
follow up on our submission
to its recent exposure draft of the provisional regulations on CPA practices carrying out cross-border
audit services.
In view of the significant implications of the exposure draft, we have alerted CPA firms that are
likely to be affected, the Hong Kong government
and relevant regulatory bodies. The document has
also aroused significant media interest, both domestically and overseas.
Two key proposals under the provisional regulations are:
(1) Non-PRC CPAs are not allowed to carry out audits for Chinese overseas-listed enterprises, including overseas listed enterprises with operating entities in China through provisional licence
arrangements.
(2) Non-PRC CPAs should enter into cooperation arrangements with the top 100 PRC CPA practices
qualified for performing audits for listed entities
in China. Under the arrangements, the non-PRC
CPAs would have to take full responsibility for the
audits and the audit reports issued by the nonPRC CPAs would have no legal effect in China.
While we understand that the overall objectives
as stated in the exposure draft are to fill the gap in
cross-border audit regulation, improve audit quality
and increase international exposure of PRC CPAs,
we are concerned whether introducing the provisional regulations is the ideal method.
In particular, the key proposals would be perceived to have the potential effect of non-compliance with Mainland, Hong Kong and international
auditing standards.
According to these standards, a CPA firm responsible for the auditor’s report of a group can assess
the risks involved in each audit engagement and
exercise its professional judgment to determine if its
staff should carry out on-site audits or to engage another CPA firm to carry out such work on its behalf.
We believe the most ideal arrangement would
be to allow the non-PRC CPA firms signing the audi-
tor’s report to decide if they need to engage PRC CPA
firms and, if they so decide, that they may choose
from firms that are already qualified to audit listed
entities within China.
In addition, several issues need to be clarified
in the exposure draft, including the meaning of operating entities in China, the scope of work under
cooperation arrangements, whether non-PRC CPAs
can enter China to review and observe audit work,
and for expected follow-up actions from non-compliance with provisional regulations.
In late May, the Court of First Instance ruled that
EY must turn over audit documents related to former Chinese client Standard Water to the Securities
and Futures Commission.
We are watching if this particular case would
have any impact on the provisional regulations and
other areas of our work. The pressing issue for Hong
Kong and Mainland regulators is to further address
the issues on how to handle auditors’ working papers in cross-border audits without violating secrecy
laws. We have recently written to the Supervision
and Inspection Bureau of the Ministry of Finance to
propose solutions to existing problems.
Apart from audit regulatory reform that will undergo public consultation later this year, regulatory issues relating to cross-border auditing is another area
that will have significant impact on our profession.
The third challenging area relates to the International Ethics Standards Board for Accountants’
exposure draft about responding to non-compliance
with laws and regulations. Last month, we hosted
the IESBA’s global roundtable and arranged various
meetings to enable Hong Kong stakeholders, including regulators, investors, professional accountants in
business and small- and medium-sized practitioners
to exchange views with the IESBA on this important
topic.
As the Mainland is our important partner, we
recently supported two major events: my speaking
engagements at the Mainland-Hong Kong Services
Industry Symposium in Beijing and with media in
Nanjing and elsewhere in Jiangsu province in connection with the SmartHK expo about the strength
of our professional services and how we can help
Chinese enterprises work up the value chain.
Clement Chan
President
June 2014
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