Hong Kong audit regulator, professionals deny claims of non-cooperation made by SEC's Gary Gensler

the regulator in Hong Kong, Public Company Accounting Oversight Board (PCAOB), Clement Chan

Hong Kong’s audit regulator and professionals have hit back against claims by the US Securities and Exchange Commission (SEC) that the city along with China does not cooperate with regulators in the US.

The Financial Reporting Council (FRC), the regulator in Hong Kong, rejected the claim and said the city has always allowed the US’s Public Company Accounting Oversight Board (PCAOB) access to Hong Kong auditors and their working papers. The most recent US inspection in Hong Kong took place in 2013, said Kelvin Wong Tin-yau, the FRC’s chairman.

“There is no restriction on the PCAOB being able to inspect working papers in Hong Kong. PCAOB officials have free access to inspect in Hong Kong,” Wong said in an interview, adding that the PCAOB and the SEC used to make a distinction between Hong Kong and mainland China.

“Regrettably, this distinction has not been made recently, as they did in the past. Furthermore, even then, the SEC statement is not entirely correct, as the restriction is on work papers located in the mainland,” he added.

The FRC’s response followed comments by SEC chairman Gary Gensler, who on Thursday said that Hong Kong and mainland China were the only two jurisdictions that had “historically” not worked with the PCAOB, while 50 others had done so. He highlighted Hong Kong and China’s non-cooperation in a statement announcing the final amendments to the Holding Foreign Companies Accountable Act of 2020, which became law at the end of last year.

the regulator in Hong Kong, Public Company Accounting Oversight Board (PCAOB), Clement Chan

US Securities and Exchange Commission chairman Gary Gensler. Photo: Reuters

The law stipulates that any foreign company listed on US exchanges faces delisting if it fails to turn over audit results for three straight years.

Wong said US regulators could inspect audits of US-listed companies anytime, as long as the documents concerned were are not in mainland China. “From the PCAOB’s data on US-listed companies audited by Hong Kong firms, there are a number of companies where no part of the audit was performed in China,” he said. Hence, the working papers of these companies were not in mainland China and the PCAOB could easily access these documents.

For example, US-listed Hong Kong company Melco Entertainment was audited by a Hong Kong accounting firm in the city, and its papers could be accessed by the US regulators.

“It is absolutely inaccurate and unfair for the US SEC to say that Hong Kong has not allowed required inspections by the US audit regulator,” said Clement Chan, managing director of Hong Kong’s fifth largest accounting firm, BDO.

After the final amendments to the Holding Foreign Companies Accountable Act of 2020, the SEC will establish procedures to identify and delist companies. This has put the more than 200 US-listed mainland Chinese companies at risk, as China does not allow audit papers to be taken out of the country for inspection, which does not comply with US regulations.

And if the SEC viewed Hong Kong as not cooperating, then local companies listed in the US might also face additional scrutiny and the risk of delisting, Chan said. “Hong Kong, as an international financial centre and a free city, has always had good cooperation with international and US regulators. As such, it is not fair for Hong Kong companies to face such scrutiny,” he added.

“It is only when local accountants are working for mainland companies that we have to follow the mainland Chinese requirements – and not US rules,” Chan said.

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