China might ban Hong Kong audits - Paul Gillis

+Paul Gillis 

Many of the audits, even of State-Owned companies, are signed off by the Hong Kong offices of the larger accounting firms. China might now ban this practice, where mainland auditing teams would anyway do most of the work, writes accounting expert Paul Gillis at his weblog.

Paul Gillis:

The South China Morning Post (SCMP) has two articles today that say that Chinese regulators are cracking down on Hong Kong firms coming into China to do audits. According to the SCMP, the proposal will require firms to use their mainland affiliates to staff engagements.

Prior to this proposal, it was possible for an overseas firm to obtain atemporary audit practice certificate to come to the mainland to audit a specific company. The process was cumbersome and often ignored.

Now the mainland affiliate will have to supply the staff for the audit. I believe that was already the case in most Big Four audits. But the rule, if implemented, will highlight the principal auditor issue that I raised on Alibabalast week. Based on Alibaba’s risk disclosures, it appears that the PwC was using mainland staff for a significant part of the audit. This proposed rule will simply make sure they do that, and will likely mean that PwC Zhong Tian instead of PwC Hong Kong signs the audit report.

As the SCMP articles explain, the practice of Hong Kong firms signing mainland audit reports is institutionalized in Hong Kong, and the loss of this franchise will hurt the Hong Kong profession. I observe that all large SOE audits are signed by the Hong Kong member firm of the Big Four, even though I believe that all of them are actually audited by mainland staff.

Mainland CPA firms have been allowed to sign H-shares in Hong Kong for several years, but all Red Chips are required to have Hong Kong auditors. The proposed rules may force a change for Red Chips as well as private companies like Tencent.

More at the ChinaAccountingBlog.

Paul Gillis is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers´ request form.

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Who is auditing Alibaba? - Paul Gillis

+Paul Gillis 

PWC is auditing Alibaba, but - writes accounting professor Paul Gillis at his weblog - it is very unclear whether the Hong Kong or the mainland offfice of PWC is doing the legwork. Officially it is the Hong Kong office, but Gillis has its doubts, and that might matter to the investors.

Paul Gillis:

Alibaba is audited by the Hong Kong member firm of PwC, or at least that is what the audit opinion says. I am a bit skeptical about that claim. While there may be a Hong Kong partner assigned to the account, I will bet dollars to donuts that a large portion of the hours on the audit were done by mainland staff. This raises the question of whether the audit should have been signed by PwC’s mainland member firm instead of the Hong Kong member firm.

Who signs the audit report matters to investors. I have read bloggers who are arguing that investors should trust the Alibaba accounts because the Hong Kong member firm of PwC and not the mainland member firm audited them. The mainland firm is currently appealing a judge’s order to suspend them from practice before the SEC – a ban that does not apply to Hong Kong. I have previously written about the practice of signing China reports in Hong Kong and said it is the same consumer fraud as a Chinese shirt maker sewing ‘Made in Italy’ labels on shirts made in Wenzhou.

Of course, PwC in Hong Kong could be auditing Alibaba using only its own staff. That seems unlikely to me based on Alibaba’s disclosures. Alibaba says that:  “Substantially all of our employees are based in China” and 94% of facilities are located at Alibaba’s headquarters in Hangzhou. To audit Alibaba, PwC needed to spend a lot of time on the ground in Hangzhou. Now, they could have flown in staff from Hong Kong to do it, but why would they do that when there is a PwC office in Hangzhou and PwC’s biggest China office down the road in Shanghai? That said, since firms often measure partner performance based on use of staff from their own group, I have seen entire engagements done with fly-in teams despite having a local office next door that could do the work much cheaper.

More at the China Accounting Blog.

Paul Gillis is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers´request form.

Are you a media representative and do you want to talk to one of our speakers? Do drop us a line.

Are you looking for more financial specialists on China at the China Speakers Bureau? Have a look here.  

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