Chinese regulators look to ban foreign auditors

19 May 2014 by Vincent Huck

The Chinese regulators have opened a consultation on proposed rules to ban foreign auditors from auditing mainland Chinese companies, local media reports.

The new rules would require international accounting firms to partner with domestic accounting firm to perform the audit of mainland Chinese companies. Previously, international firms could apply for a temporary audit practice certificate to enter mainland China.

According to the South China Morning Post (SCMP), the Chinese Ministry of Finance posted on its website (in Chinese only) the proposed change in regulation which is out for consultation until the end of the month.

The local newspaper said that if accepted the new rules would have a detrimental impact on the career opportunities for young Hong Kong accountants. "As a result, the Big Four and other international firms are likely to scale down their hiring in Hong Kong but increase their hiring on the mainland for their operations there," the newspaper reported.

But Peking University professor of practice Paul Gillis wrote on is blog dedicated to accounting in China, that the new rule will only impact Hong Kong accountants who are not willing to go to mainland China and pass the Chinese CPA examination.

"But this will have no meaningful effect on the Big Four firms - the work simply shifts to the mainland, as it mostly already has," he wrote.

Gillis noted two other potential impacts the new rule could have. First he believed that the proposed rules may force a change for Red Chips, companies based in Mainland China that are incorporated internationally and listed on the Hong Kong Stock Exchange (HKSE), as well as private companies. Up to now this companies were required to have Hong Kong auditors.

"I think the HKSE is going to have to allow mainland firms (mostly the Big Four affiliates) to sign Red Chip accounts as well as those of privately owned companies," he told The Accountant.

Second he believed that the proposed rules will threatened small US based firms which specialise in reverse mergers, the acquisition of a public company by a private company so that the private company can bypass the lengthy and complex process of going public.

"The Big Four mostly refuse to audit reverse mergers, and these local firms from US picked up the work," Gillis told The Accountant. "Some US firms have already been banned by the PCAOB/SEC and because they don't have mainland affiliates, I think these firms are about to be wiped out."

He believes that consequently their clients will have a hard time finding new auditors. "These are small, risky reverse merger clients and no one will take the risk. Even Chinese firms," he said.

At the time of publication, the Hong Kong Institute of Certified Public Accountants wasn't available for comment.


Related link

Hong Kong Institute of Certified Public Accountants