Turning the tables
In a development that is likely to transform the accounting professions in Hong Kong and Mainland China, Chinese accounting firms are gaining access to one of the most lucrative markets for accounting services. On December 10, 2010, Hong Kong Exchange and Clearing Limited (HKEx) decided to accept financial statements of Mainland companies listed in Hong Kong that are prepared under Chinese accounting standards and audited by Mainland accounting firms. This work had previously been limited to Hong Kong CPAs and had become a significant portion of their work.
In 1993, nine leading Chinese companies were selected to list “H-shares” on the Hong Kong Stock Exchange as a means to raise capital and improve corporate governance. The success of this experiment led to additional listings, and by 2009 there were a total of 152 H-share listings with a market capitalization of US$587 billion. Chinese companies also listed “Red Chips” in Hong Kong, which were the shares of companies incorporated outside the Mainland yet which are controlled by state owned enterprises and which conduct most of their operations on the Mainland. By 2009 there were 97 Red Chips with a market capitalization of US$486 billion. Today, H-shares and Red Chips account for half of the market capitalization of the Hong Kong Stock Exchange. Chinese companies also listed on other international exchanges, with over 300 listed on US exchanges, 140 in Singapore, 80 in London and 47 on the Toronto Stock Exchange. Five of the top ten initial public offerings (IPOs) in the world in 2007 came from China, and Chinese companies account for four of the ten largest IPOs in world history.
The web has been ablaze today with the news that Tsingtao Brewery Co. Ltd. (HKSE 168) has asked shareholder approval to fire PricewaterhouseCoopers in order to “improve efficiency and reduce the costs of disclosure”. While this captured everyone’s attention, including mine, I then read who the new auditor is proposed to be: PricewaterhouseCoopers Zhong Tian. Because PwC operates as an integrated firm in Hong Kong and the Mainland, nothing significant is changing. PwC Zhong Tian is PwC’s member firm on the mainland, and the Qingdao office of PwC Zhong Tian has been doing the audit since the client was acquired with PwC’s acquisition of the China and Hong Kong assets of Arthur Andersen in 2002.
Previously the Hong Kong Stock Exchange generally required that a Hong Kong CPA sign accounts of listed companies and required that the accounts be prepared under Hong Kong Financial Reporting Standards (HKFRS). On October 12, 2010 the Hong Kong Stock Exchange agreed to allow Mainland issuers to file accounts using Chinese Accounting Standards (CAS) and to use approved Mainland auditors. China had pushed for these rules as a means to allow their local firms a chance to compete for H-share work, and this shift from PwC Hong Kong to PwC Qingdao will disappoint those firms who had hoped to get a shot at the work.