Tuesday, April 09, 2013

Hong Kong SFC Chair Discusses Cross-Border Regulation and Auditor Relationships

Chairman Carlson Tong of the Hong Kong Securities and Futures Commission recently examined cross-border financial regulation, particularly in the area of outside audit relationships. While noting the appropriateness of overhauling financial regulation with a focus on global co-operation and global convergence, he warned of the risk of a one-size-fits-all solution without adequate regard to the different sophistication of local regulatory systems and the maturity of economic and financial development. He pointed out that some of the legislation and regulations that have already been formulated will have far-reaching extraterritorial effect on foreign jurisdictions.

Noting that some Mainland privately-owned enterprises listing in Hong Kong have reported deteriorating results not too long after their listing, Chairman Tong, a former auditor and Chair of KPMG China, said that this situation presents an issue of cross-border regulation around access to information, especially access to auditor working papers, which he said has recently ``become a burning issue.’’

While observing that it is not appropriate to comment in detail on the ongoing proceedings against Ernst & Young over access to auditor working papers, the SFC Chair generally stated that it is important for the SFC and auditors to be able to discuss issues that may arise from the audits of listed companies in Hong Kong, especially if there are issues that may affect the integrity of the market for shares in a listed company.

While the auditor is often likened to a watchdog rather than a bloodhound, he noted, the SFC can properly be described as a bloodhound and the regulatory framework presumes that the watchdog auditor will be able to put the bloodhound regulator on the scent. To do this, auditors must be able to discuss matters they come across and issues that the regulator comes across, and sometimes that must involve disclosing matters contained within the audit working papers.

He said this is a little different from the issue that has arisen in the U.S. where the spotlight has recently focused on non-US audit firms located on the Mainland. This raises a significant cross-jurisdictional issue because it involves Mainland firms and a foreign regulator. In contrast, the question in Hong Kong concerns Hong Kong firms and the application of Hong Kong law.

For its part, the Securities and Futures Commission will continue to implement and adopt global financial regulatory reforms but at the same time make adaptations to suit the uniqueness of Hong Kong’s securities markets through involvement in the International Organization of Securities Commissions and other global regulatory bodies. Chairman Tong emphasized that the profile of the players in Hong Kong’s securities and futures industry is quite unique with a combination of international, local and an increasing number of Mainland players.

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