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HK CPAs can do China audits

New rules restricting the activities of foreign CPAs in China went into effect on July 1. Today, the South China Morning Post reports that Hong Kong CPAs have been largely exempted from these new rules. 

Hong Kong CPA firms will be required to leave their working papers on the mainland. That should cause considerable concern to Hong Kong and US regulators who will be unable to review the work of auditors without the cooperation of Chinese regulators. 

I believe the real crackdown to come is over the US listed Chinese companies that are audited by small US based accounting firms. Most of these companies came to market through reverse mergers and trade thinly, if at all, on over-the-counter boards. These companies have had a high incidence of fraud and have embarrassed Chinese regulators who have no authority over them. After the NYSE and NASDAQ cracked down on reverse mergers by requiring a seasoning period before listing, the reverse merger market for Chinese companies in the U.S. died, replaced by China’s National Equities Exchange and Quotations (NEEQ – China’s third board). NEEQ has listed over 2,000 small Chinese companies with an average market cap of under $75 million. 

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