Hong Kong gets Chinese audit papers the U.S. is demanding

Hong Kong has received the first access to financial audits from mainland Chinese companies, an issue that has vexed relations between the U.S. and China and threatens to lead to the delisting in New York of giants such as Alibaba Group Holding Ltd.

As part of a 2019 understanding with the Chinese Finance Ministry, the Hong Kong Financial Reporting Council has now obtained the first batch of audit papers from mainland China, becoming the first offshore regulator to break through the state secrecy barrier.

The access to such documents has been a hot-button issue between China and the U.S. for more than a decade. China has so far refused to let inspectors from the Public Company Accounting Oversight Board review audits of Chinese companies that trade on U.S. markets.

That in turn led U.S. lawmakers to this month pass legislation to delist Chinese companies if access continues to be denied, while China has said it’s willing to work through the problem with the incoming Biden administration. The turmoil has already prompted a number of U.S.-listed Chinese companies to also start trading in Hong Kong, and regulators in the Asian financial hub say the audit access should be reassuring for investors.

“If the companies that may leave the U.S. markets come to Hong Kong, then, yes, we’re confident that we will be able to carry out our regulatory functions in relation to those entities,” Marek Grabowski, the new chief executive officer of the city’s Financial Reporting Council, said in an interview Wednesday.

Paul Yeung/Bloomberg

Some 220 Chinese companies worth about $2 trillion are at risk of being forced to leave the U.S. market, including giants like Alibaba and Baidu Inc. Since 2009, companies based in mainland China have been forbidden to transfer accounting records, including audit working papers, offshore without the consent of authorities due to state secrecy concerns.

FRC, the regulator for auditors of Hong Kong-listed companies, has made requests for 11 investigations so far and received seven. In the next stage, it plans to demand access to working papers for inspection, Grabowski said.

Grabowski came to Hong Kong this October, after serving at the U.K. Financial Reporting Council as the director of audit policy for 10 years and after another decade with the International Auditing and Assurance Standards Board.

In the same interview, FRC Chairman Kelvin Wong said the agreement has so far worked well and could be replicated elsewhere.

It’s an agreement that the Chinese Finance Ministry “is willing to enter into with any other overseas financial regulator,” Wong said. “It’s up to any foreign financial regulators to consider whether they would like to enter into such agreement with the MoF.”