Guidance Issued for Business Cooperation Agreements between Hong Kong and Mainland Audit Firms
The Ministry of Finance (MOF) has issued updated guidance on matters to be included in business cooperation agreements between Hong Kong and Mainland audit firms, as part of its Interim Provisions. This new guidance aims to provide clarity on the requirements for overseas accounting firms operating in China.
Key Concerns for Overseas Accountants
- One major concern for overseas accountants is that the Interim Provisions require them to sign off on the audit report and be responsible in law for the audit work performed. This means they will be liable for any failures of their Mainland partner firm, which may pose a significant risk.
- Another restriction prohibits overseas accounting firms from sending staff to China to audit companies under a temporary license.
Documentary Requirements
To operate in China, overseas accounting firms must submit certain documents to the provincial public finance department at least 7 days before providing audit services. These include:
- A photocopy of the audit engagement signed with the Mainland company
- The written business cooperation agreement signed with the Mainland accounting firm
- A report letter in the form set out in Annex 1 to the Interim Provisions
Additionally, overseas accounting firms must submit a written report within 60 days of the business reporting date, detailing their audit work.
Confidentiality Requirements
The Interim Provisions stipulate that both Mainland companies and overseas accounting firms must comply with the Provisions on Strengthening the Relevant Confidentiality and Archives Management Work Relating to the Overseas Issuance of Securities and Listing. This means that accounting records, including audit working papers, may be subject to claims of state secrecy under Chinese law.
Exemption for Hong Kong Auditors
Hong Kong audit firms are exempt from partnering with Mainland accounting firms if at least half of the Mainland company’s shares are held by Hong Kong investors. Macao and Taiwanese auditors also enjoy similar exemptions.
However, if the 50% ownership threshold is not met, Hong Kong auditors must still team up with a Mainland audit firm. The requirements for the Mainland partner firm are relaxed, requiring at least 25 certified accountants instead of IPO or listed company audit experience.
Access to Audit Working Papers
The restriction on taking Chinese audit papers out of China creates challenges for regulators and accountants seeking access to these documents. In recent cases, both the Hong Kong Securities and Futures Commission (SFC) and US SEC have sought access to Chinese audit working papers. The MOF has agreed to consider setting up a system allowing offshore securities regulators to access audit working papers for investigation purposes.
Conclusion
The updated guidance aims to provide clarity on the requirements for overseas accounting firms operating in China. While there are still significant concerns around liability and confidentiality, Hong Kong auditors enjoy exemptions from partnering with Mainland firms if certain ownership thresholds are met. As the market continues to evolve, it remains essential for accountants, regulators, and investors to stay informed about these developments and their implications.