China’s Ministry of Finance has clarified that there is no “blanket ban” on audit documents relating to Chinese state-owned enterprises and other companies from leaving the mainland – provided they do not contain “state secrets.”
The comments were made in meetings between Clement Chan, Chairman of the Hong Kong Institute of Certified Public Accountants, and ministry officials.
There have been conflicting reports about the type of Chinese documents permitted to be processed by auditors outside of China, especially for audits conducted in Hong Kong.
In a recent case brought before the territory’s Securities & Futures Commission, the Hong Kong offices of global audit firm EY were told that there was no justification for EY to withhold audit documentation from the SFC when requested to do so under the rationale of “state secrets.”
In this latest announcement, the Ministry of Finance clarified that the proposed new rules concerning audits conducted by overseas personnel were only intended as a tightening of regulations for auditors working in China, and not as a blanket ban closing China to all overseas audit teams.
Officials from Hong Kong’s Securities & Futures Commission have said that they plan to hold further meetings to clarify the Ministry of Finance’s exact position.
“The catch here is the definition given to ‘state secrets’,” says Chris Devonshire-Ellis of Dezan Shira & Associates. “There are some suspicions that China’s SOEs, in particular, are loathe to open their full accounts to international auditors, as doing so may reveal the extent of funding given to them by the state in contravention of WTO rules.”
“Plus there are concerns that Chinese banks have been deliberately re-categorizing non-performing loans to better project a healthy balance sheet.”
“We will have to see how far China is prepared to go in allowing full transparency of SOE accounts,” says Devonshire-Ellis. “A lot remains to be done.”