Former premier Zhu Rongji is known for his poker face. Unlike his self-aggrandising peers, Zhu rarely painted the huge calligraphy displays that one finds hanging at the doorways of almost every major mainland institution. He only did four.
It was spring 2001. He was visiting the newly founded Shanghai National Accounting Institute, one of the country’s three schools for accountants.
He wrote four words: “Bu zuo jin zhang (No book-cooking).”
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Hong Kong should get fair deal over entry of mainland auditors
Shirley Yam
14 November 2009
Former premier Zhu Rongji is known for his poker face. Unlike his self-aggrandising peers, Zhu rarely painted the huge calligraphy displays that one finds hanging at the doorways of almost every major mainland institution. He only did four.
It was spring 2001. He was visiting the newly founded Shanghai National Accounting Institute, one of the country’s three schools for accountants.
He wrote four words: “Bu zuo jin zhang (No book-cooking).”
“Uphold your integrity ... Don’t bow to any pressure,” Zhu said later at an international accounting conference in Hong Kong, where he spoke about the four characters he had written.
Months before that, auditors were caught cooking the books for A-share companies. The China Securities Regulatory Commission ended up sending its audit teams, headed by then “foreign” vice-chairman Laura Cha, to every issuer.
So it is hard not to worry about the Hong Kong stock exchange’s latest proposal to accept mainland accounting standards and let mainland auditors vet the books of H-share firms - and the deafening silence the proposal has so far received.
The importance of an independent and professional auditor cannot be overstated, particularly when it comes to examining firms on the mainland, where our regulators and investors rely largely on second-hand information.
It is fair to say that Beijing has done much in upgrading its auditing profession. About 85,000 auditors have been trained in the past 10 years. Accounting standards were altered significantly to mesh with international benchmarks in 2006.
But auditors do not work in a vacuum. Their working environment is one where the rule of law is lax, professionalism is not respected and protected and there is no independent media to cry foul.
The plan to make these auditors gatekeepers for our shareholders should have stirred controversy. Yet it did not. As the consultation period ended two weeks ago, professional groups supported it.
Their reasoning: First, trust the market. Companies will stick with the Big Four and other reputable auditors to reassure investors and creditors. That may be the case for the brand-aware blue chips. But for the majority, costs and the co-operativeness of an auditor are often much bigger issues, especially after the public offering.
Second, trust the state. Coming to Hong Kong is the first move of Beijing’s big plan to reform and internationalise its audit profession. And the mainland authorities, in particular the Ministry of Finance, will keep malpractice out with more effective, if not draconian, measures than ours.
Sure. But have we not seen how non-political priorities and technocrats are pushed aside in many politically controversial cases?
And do you know who has the final say in the size of any loss provision made by a state-owned enterprise? No, not the auditor. It is the Ministry of Finance, given the tax implications of a provision.
Lastly, if you cannot fight it, embrace it, as the senior partner of a Big Four firm has put it. It is only a matter of time before the world has to accept mainland professionals. An early start allows both sides more time to learn and adjust.
That is the honest answer. To put it bluntly, we do not really have much choice.
The ministry has been lobbying for acceptance of its auditing professionals in Hong Kong since 2006. It is politically incorrect for us to tell Beijing: “Sorry, we don’t trust your system.” Not when we have been asking for all sorts of favourable treatment from Beijing. Not when everyone’s mouth is watering for the big market up north.
In return for opening doors for their mainland peers, local accounting firms will be allowed to audit Hong Kong companies to be listed in the A-share market. This is not to mention the merger and acquisition push coming from Beijing for both mainland and Hong Kong auditors.
And there is the risk of antagonising mainland authorities, which could block mainland issuers from listing in Hong Kong.
There isn’t a choice about whether to accept it, but we should at least have a say in the details. How will investors in our market be shielded from the additional risk of accepting a mainland auditor? So far, our regulators have been quiet on this.
Clues from some insiders indicate that accords will be signed by Hong Kong and mainland regulators. The ministry will investigate mainland auditors over complaints referred by our regulators and decide on penalties. Local watchdogs will be granted access to the working papers of mainland auditors for their investigation.
While these measures appear to tighten the grip on auditors, they do not get to the root of the problem - who cooks the books. Is it the firm’s management with the auditor as an accomplice or a fool? Yet once the managers have fled for the mainland, unless the case is controversial enough to get the State Council involved and deliver them at Lo Wu Bridge, our regulators have little chance of laying their hands on them. That is not a very good basis for getting corporate managers to behave and making auditors stay awake.
Our regulators should make use of the chance to get the ministry into the investigation - not just of mainland auditors but also of corporates involved in commercial crimes in Hong Kong. If mainland authorities can mete out punishment in their capacity as an agent of the Hong Kong regulator - that is what we’re looking for.
Don’t say it is too far-fetched. We are talking of a deal here. In return for international recognition for the mainland auditors - and hopefully not in exchange for the credibility of our regulatory regime - we should get something precious.
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