No Ban on Audit Documentation from Leaving China, Says Ministry of Finance

June 12, 2014 Posted by China Briefing Reading Time: 2 minutes

SHANGHAI – China’s Ministry of Finance has clarified that there is no “blanket ban” on audit documents relating to Chinese companies and SOEs from leaving the mainland, provided they do not contain “state secrets.” The comments were made in meetings between the Hong Kong Institute of Certified Public Accountants Chairman Clement Chan and officials from the mainland Ministry of Finance.

Recently, conflicting reports have circulated on 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 Ernst & Young were told that there was no justification for E&Y 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 next week to clarify the Ministry of Finance’s exact position.

Chris Devonshire-Ellis of Dezan Shira & Associates comments, “The catch here is the definition given to ‘state secrets.’ 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. Whether or not these behaviors, if they exist, amount to ‘state secrets’ or not is a bit of a moot point, and doesn’t make the job of stringently conducting audits according to international standards any easier. We will have to see how far China is prepared to go in allowing full transparency of SOE accounts. A lot remains to be done.”

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email china@dezshira.com or visit www.dezshira.com.

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