Hong Kong audit regulator reaches landmark agreement over mainland audit papers

In a press release, the AFRC said it had “reached a consensus with the Bureau of Supervision and Evaluation (SEB) of the Ministry of Finance (MOF)” for a new agreed mechanism by which the AFRC can obtain audit working papers of PIE auditors located on the mainland for inspection in Hong Kong (AWP-C). Both parties would “evaluate the agreed mechanism from time to time to ensure it runs smoothly and efficiently”¹.

The AFRC observed that “inspection of listed entity audits is critically important as the capital markets of Hong Kong and the Mainland become increasingly connected, and accounting firms continue to expand their practices across the border”.

The arrangement would not only facilitate “AFRC’s inspection of engagement involving AWP-C but also sends a strong message to PIE auditors that their audit engagements are subject to the AFRC’s quality review no matter where they keep their audit working papers.”

In October 2022, the AFRC said it was working with MOF to set up a “fast track” for it to get access to mainland audit working papers. Chairman Kelvin Wong Tin-yau said that it had taken more than a year to receive audit documents from mainland authorities in five separate inquiries. He said the mechanism then in place “involves a lot of approval procedures from different bureaus”.

The announcement comes a year after United States regulators announced they had gained access to the audit records of Chinese companies listed in the U.S. More than 30 staff from the Public Company Accounting Oversight Board (PCAOB) spent nine weeks conducting on-site inspections in Hong Kong of some high-profile U.S.-listed Chinese companies. PCAOB reached an agreement with the China Securities Regulatory Commission to gain access to the papers.

The PCAOB said that its staff was able to carry out inspections “without any interference or input from PRC authorities” and that information requested was supplied without being withheld or redacted. That agreement meant that nearly 170 Chinese companies, which had been threatened with de-listing due to a failure to enable audits for three consecutive years, were permitted to remain listed.

In May 2023, however, the PCAOB said it had found an “unacceptable rate” of deficiencies in its initial review of audits of mainland Chinese firms. The deficiencies noted were not expected to affect the status of those companies listed in the U.S. The shortcomings identified were described as consistent with the types of shortcomings previously found in other first-time inspections globally.

Authored by Yolanda Lau and Nigel Sharman.

References

1 AFRC starts inspecting engagements involving audit working papers located on the Mainland, AFRC 15 December 2023