Just as global investors are turning to Hong Kong for stakes in China’s growth, they will no longer be able to rely on the comfort of a Hong Kong auditor signing off on financial statements—or more importantly, a local regulator to hold the auditors accountable. A recent change in rules for accounting standards on the Hong Kong’s stock exchange is
raising concerns that fraud will slip through the regulatory cracks. The new rules will cut costs for mainland companies seeking to list in Hong Kong if they choose to prepare one set of financial statements instead of two, but now the companies will have to rely on mainland Chinese authorities to root out fraud.
The rules also go against the trend in other jurisdictions, where regulators are pushing for more due diligence. In the U.S., where 21 of the 27 foreign offerings this year were Chinese, the Public Company Accounting Oversight Board warned auditors not to rely on financials prepared by mainland Chinese accountants and urged them to visit China to check out the companies.