HONG KONG: Hong Kong's pending acceptance of mainland accounting standards will mark an important advance in Beijing's drive to globalize its financial sector, but could also challenge international investors with reports prepared by an industry prone to scandal.

A proposed rule change likely to take effect next year would see Hong Kong's stock exchange allow locally-listed mainland firms to report using their home accounting standards, a move designed to lower costs and keep Hong Kong competitive with Shanghai.

But concerns about supervision of mainland auditors have led to delays, making it unlikely the exchange will meet its Jan 1 target date for implementing the change.

The change will also lead to variant results for certain industries, such as insurance, although those differences are expected to fade over time as standards converge.

"There is a confidence issue," said Judy Wong, president of the Association of Chartered Certified Accountants (ACCA) Hong Kong, a group whose members stand to lose substantial business to lower-cost mainland accounting firms under the rule change.

"The (Chinese) Ministry of Finance should let the public know how they vet the applications from mainland accounting and audit firms and what the criteria are," she said, adding ACCA agrees with the proposal's direction, but issues need to be resolved.

The unification of standards will permit mainland firms whose shares trade in Hong Kong, known in the city as H-shares, to post a single set of results for each reporting period identical to the report they put out for their mainland-listed shares.

Most Hong Kong-listed mainland firms are expected to use their home standards for their Hong Kong reports once the move becomes official, both as a money-saving measure and to reduce confusion that often occurs due to differences in the reports released on the mainland and in Hong Kong.

Insurance companies such as China Life and Ping An Insurance now see some of the greatest variation due to different treatment of investment gains and losses. Others such as banks, airlines and resource companies would see little or no change.

Investors do not expect any big impact on stock prices from the accounting change.

Patrick Yiu, a fund manager at CASH Asset Management in Hong Kong, said he will not change his investment strategy after the new accounting standards are adopted, and that the move should be welcomed by the broader market.

"Though there is some concern over discipline among auditors on the mainland, I don't think it will be a major issue, and many major mainland enterprises will do their best to disclose the most useful information to their investors," he said.

Hong Kong's move testifies to the growing importance of the mainland for international investors, who are increasingly eyeing a steady stream of mainland IPOs that are open to most outsiders only through off-shore listings in places like Hong Kong.

Mainland accounting firms that prepare reports under home standards charge about one-third as much as their Hong Kong counterparts, making them more attractive in terms of price.

But any cost gains could easily be offset by an industry where book-cooking scandals were so common less than a decade ago that they led former Premier Zhu Rongji to call fraudulent accounting a "malignant tumor" that threatened the country's economy.

To help minimize that risk, Hong Kong, under the proposal it is now considering, would only recognize mainland auditors who have passed muster with the Finance Ministry and securities watchdog, the China Securities Regulatory Commission.

Other checks and balances are also being discussed.

"We expect it will come up with a list - it should not be more than five firms," said Jack Chow, a Hong Kong-based partner at global accounting firm KPMG.

That list is expected to include domestic leaders like RSM China, Shinewing Certified Public Accountants and BDO China Shu Lun Pan CPAs, with future approvals expected to follow.

Reuters

(HK Edition 12/31/2009 page6)