The Hong Kong Securities and Futures Commission's (SFC) sponsor regulations lack teeth without an independent audit regulator, according to Public Company Accounting Oversight Board (PCAOB) standing advisory group member and Peking University professor Paul Gillis.
Gillis, who writes China Accounting Blog – including commentary on accounting standards for US-listed ChinaCos – said while Hong Kong's new IPO sponsor regulations are well intended, they may not lift the credibility of HK-listed ChinaCos. Instead Gillis said an independent audit regulator is needed to maintain the integrity of Hong Kong's capital markets. The Hong Kong Institute of Certified Public Accountants (HKICPA), which has self-regulated the market, is not active on the enforcement side.
"Especially in respect to Chinese stocks, there's a huge credibility problem: there are concerns that financial information is unreliable," he said. "The main method of ensuring reliability is auditing, but there are questions about the quality of auditing. The biggest weakness in Hong Kong is the lack of an independent audit regulator," he added.
The 2002 Sarbanes-Oxley Act established the US Public Company Accounting Board following the collapse of Enron. Singapore's independent audit regulator is the Accounting and Corporate Regulatory Authority (Acra) and Malaysia's is the Audit Oversight Board.
In comparison to these regimes, Hong Kong's system lacks transparency. In-house counsel and private practice lawyers agreed they do not know of any enforcement actions undertaken by the HKICPA. It is widely agreed that Hong Kong must upgrade its accounting provisions.
"Hong Kong is stuck in an old system where the profession is largely self-regulated by the HKICPA, which doesn't have a history of being particularly tough, especially on its larger members," Gillis said.
He added that for Hong Kong to become a top financial market, an independent audit regulator must be established – even if accounting firms, that don't want additional scrutiny, oppose the move.
In the absence of an audit regulator, the SFC has been actively pursuing enforcement actions against accountants. This year it commenced legal action against Ernst & Young regarding the disclosure of Standard Water's work papers, a case similar to that of the US Securities and Exchange Commission's case against Deloitte Touche Tohmatsu Shanghai for refusing to present Longtop Financial Technologies' work papers.
But Gillis noted that looking after auditing isn't the SFC's purpose.
"The SFC is under-resourced and shouldn't be looking into audits: it's not really the proper role of a securities regulator," he commented. "The SFC is meant to be on the enforcement side."