Hong Kong Exchanges and Clearing Limited (HKEx) announced its decision on 10 December 2010 to accept Mainland accounting and auditing standards and Mainland audit firms for Mainland incorporated companies listed in Hong Kong. HKEx has noted comments in media reports and elsewhere on the decision, some of which suggest there are misperceptions about the basis of and reasons for the decision. Therefore it would like to clarify a few points in the following questions and answers.
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Why did HKEx choose to adopt Mainland accounting standards? |
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HKEx did not “adopt” Mainland accounting standards. In the past, listed companies were normally only permitted to use Hong Kong Financial Reporting Standards (HKFRS) or International Financial Reporting Standards (IFRS) and HKEx expects the majority of listed companies will continue to use these standards. However, HKEx will now allow Mainland incorporated companies to use Mainland accounting standards as they are already substantially converged with the widely recognised IFRS, as clearly stipulated by the International Accounting Standards Board. With recognised convergence of Mainland Accounting Standards with IFRS and with the large number of Mainland companies listed in Hong Kong, there is no reasonable justification for HKEx not to recognise Mainland accounting standards as one of its accepted accounting standards. |
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Is Hong Kong the only market outside China that has accepted Mainland accounting standards? |
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No. Other major stock exchanges such as the London Stock Exchange, New York Stock Exchange, Australian Stock Exchange, Toronto Stock Exchange, and stock exchanges in the European Union (EU) accept IFRS or other national accounting standards and have had similar arrangements in place before Hong Kong. For example, the European Commission announced on 12 December 2008 that Mainland accounting standards, amongst others, were regarded as equivalent to IFRS as adopted by the EU. |
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Has HKEx’s decision to accept Mainland accounting and auditing standards and Mainland audit firms been taken lightly or done in haste? |
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No. The decision was made after thorough due process and careful consideration by both Mainland and Hong Kong regulators.
The China Accounting Standards Committee and the China Auditing Standards Board signed joint declarations with the Hong Kong Institute of Certified Public Accountants (HKICPA) on 6 December 2007, which declared that accounting and auditing standards in Mainland China have substantially converged with Hong Kong’s accounting and auditing standards. In the 20 months from January 2008 to August 2009, regulators in the Mainland and Hong Kong (i.e. the Financial Services and the Treasury Bureau, Hong Kong Securities and Futures Commission (SFC), Financial Reporting Council (FRC), HKICPA and HKEx) jointly explored mechanisms to facilitate financial statements prepared and audited under one jurisdiction to be acceptable for the purpose of listing on a stock exchange in the other jurisdiction. A proposed framework was developed and later endorsed by all parties, following which HKEx issued a consultation paper in August 2009. Views of a wide range of parties were sought through the public consultation and other channels, and all comments, including objections, were considered. The overwhelming majority of the respondents supported the framework. |
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Why was there such a long delay between the original proposed implementation date (i.e.,1 January 2010) and the implementation of the new framework? |
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Substantial time, which was more than originally expected, was required by the regulators on the Mainland and Hong Kong to complete the preparatory work including a comparison of the practice review systems over audit firms and to develop and agree on the cooperative arrangements between the Mainland and Hong Kong regulators. |
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Is HKEx's decision aimed at winning more Mainland business? Is there a "quality versus quantity" issue? |
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No. The reasons for HKEx's decision for mutual recognition have been explained above and are unrelated to attracting additional Mainland companies to list in Hong Kong. HKEx does not believe accepting Mainland accounting standards and Mainland auditors will impact the quality of its market. HKEx has a firm policy that quality markets attract quality companies and investor confidence. HKEx is a staunch advocate of this policy and it remains unchanged. |
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Does the framework mean that Hong Kong has handed over part of its regulatory authority to the Mainland? |
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The new arrangement will not reduce Hong Kong regulators’ effectiveness over companies listed in Hong Kong. Hong Kong-listed companies will remain subject to Hong Kong’s Listing Rules and the Securities and Futures Ordinance.
Financial reports using HKFRS, IFRS or Mainland accounting standards will continue to be subject to monitoring and oversight by Hong Kong regulators.
All audit firms servicing Hong Kong listed companies including Mainland audit firms that service Hong Kong listed companies will also be subject to the Listing Rules and the FRC Ordinance.
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How can Hong Kong regulators, like the FRC and HKICPA, carry out investigations on Mainland audit firms? |
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Similar to cross-border regulation in many other markets, effective regulation relies on regulator-to-regulator cooperation. This arrangement is not unique to Hong Kong. The framework will make use of the existing regulatory bodies on the Mainland and Hong Kong.
Hong Kong is fortunate that cooperative arrangements have been established between the statutory enforcement agencies on the Mainland and Hong Kong.
The FRC has established co-operation arrangements with Mainland regulators on investigations and enquiries within the scope of the FRC’s remit as set out in the FRC Ordinance. Enquiries into the conduct of Mainland audit firms are also subject to Mainland law. In practice, formal investigations of Mainland audit firms will be carried out by the Ministry of Finance (MOF) and China Securities Regulatory Commission (CSRC), either acting on a direct complaint or as agents on behalf of the FRC, to the extent permitted by Mainland laws. A Mainland audit firm will be required to provide documents to MOF and CSRC to enable MOF and CSRC to carry out and finalise their enquiries.
The responsibility for taking appropriate disciplinary action and sanctions against Mainland audit firms will also rest with MOF and CSRC, which are government bodies independent of the profession. |
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Is HKEx concerned about investor trust and regulatory credibility in the Mainland’s accounting and governance standards? |
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It is noteworthy that a host of investor protection measures have been put in place to ensure the quality of Mainland audit firms and their work. Strong and effective enforcement is the key.
Under the framework, Mainland audit firms intending to service Mainland incorporated companies listed in Hong Kong as either a reporting accountant or as an auditor must first be approved and registered by MOF and CSRC according to a set of stringent criteria.
In addition, HKICPA’s review of the Mainland practice review system indicated that the Mainland practice review system is similar to the Hong Kong practice review system.
The MOF and CSRC, in their vetting approval process of Mainland audit firms, will assess and monitor continued compliance with CSQC5101 (China Standards on Quality Control) and other Mainland auditing standards.
The MOF and CSRC will be responsible for continuous monitoring and oversight of approved Mainland audit firms. Mainland audit firms will be subject to monitoring through practice review inspections by on-site visits and reviews of audit working papers usually on a cyclical basis, which is similar to the current practice adopted by HKICPA in reviewing Hong Kong audit firms which service listed companies.
Continuous monitoring and oversight of Mainland audit firms by Hong Kong and Mainland regulators will ensure that the Mainland audit firms are competent in providing audit and related services to Mainland incorporated companies listed in Hong Kong. |
Over the past 30 years the Mainland’s development has been the envy of many. Indeed, since the listing of the first Mainland enterprise, Tsingtao Brewery in 1993, its progress and development has also resulted in it embracing, inter alia, international standards and best practice whilst adapting Mainland standards and practice to converge. It is therefore a natural evolution to see Mainland accounting standards accepted in Hong Kong.
As China’s international financial centre, Hong Kong is fortunate that it has local and multi-national professionals and experts as promoters and guardians of its hard-earned position. HKEx will continue to work together with stakeholders to solidify Hong Kong’s position as one of the world’s premiere financial centres while prudently adapting to changing market conditions.
Ends