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HK races to bottom in corp gov

The Hong Kong Stock Exchange (HKSE) has issued its latest proposal to weaken corporate governance standards in order to attract Chinese listings that have gone to the US. The US has won most of the listings of China's privately held companies, including bellwethers Alibaba, Baidu and Sina. There are several reasons for that, including the fact that the US permits weaker governance than Hong Kong or China, and that fees for investment bankers are considerably higher with US listings. The weaker governance rules led to the NYSE winning the Alibaba listing over the HKSE. Hong Kong faced the possibility it would not win another major IPO from China because most Chinese founders want a controlling vote, even when they no longer hold a majority of the shares.  

Much to the consternation of corporate governance advocates, Hong Kong proposes allowing control structures (called weighted voting rights - WVR).   Shareholder advocates in the US have opposed the proliferation of these structures in technology companies. Hong Kong is also proposing to relax other listing standards related to profitability. 

Drown HK audit regulation in a bathtub

Hong Kong has finally released proposed legislation (over 250 pages) to reform audit regulation in Hong Kong. This process began in 2014 after the European Union withdrew regulatory equivalency from Hong Kong citing its ineffective system of audit self-regulation. Although most members of the profession publicly supported the proposed legislation, privately they have been resisting it, which is why the process has taken so long. 

If the legislation is enacted, the Financial Reporting Council (FRC) will become the regulator of auditors of public interest entities in Hong Kong, much as the US’s PCAOB and Canada's Public Accountability Board (CPAB) took over regulation of auditors of public companies in the US and Canada.

Section 20F provides that the HKICPA Council may impose any condition on registration of auditors that it considers appropriate. The PCAOB has refused to register any more Chinese or HK CPA firms on the basis that they are unable to agree to turn over working papers for inspection. The PCAOB has not chosen to revoke existing registrations of firms that are unable to turn over working papers, although it has picked on a couple of small firms. I don’t see that firms will be required to consent to turning over working papers as a condition of registration in Hong Kong. 

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