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Regulatory reform in Hong Kong

There is a turf battle between the Securities and Futures Commission (SFC) in Hong Kong and Hong Kong Exchanges and Clearing (HKEx) over who should regulate new listings in Hong Kong.

Hong Kong is somewhat unusual since regulation of listings and auditors has been delegated to the regulated, a form of regulatory capture. The HKEx regulates listed companies, with the Hong Kong Institute of CPAs (HKICPAs) regulating auditors, leaving government regulators in a supporting role. Unsurprising, self-regulation rarely works, since market participants rarely take actions against themselves.  

Self-regulation is usually the preference of the regulated professions because professionals get the benefits of regulation but control any disadvantages of regulation. Professionals always seek closure – to limit market access to newcomers.  In Hong Kong, CPAs must be licensed by the HKICPAs, meaning that only members can provide audit services.  Yet while limiting market access and competition, the HKICPAs has done a pathetic job regulating its members.  Fines, when they happen, are insignificant and even serious violations by the Big Four get only a slap on the wrist. 

Regulatory equivalency - bad for investors

China has long argued that the Public Company Accounting Oversight Board (PCAOB) should rely on Chinese regulators to examine the work of Chinese accounting firms that are also subject to US inspection under Sarbanes-Oxley. This concept is known as regulatory equivalency, where a regulator is to consider the work of a foreign regulator as the equivalent of doing it itself. The PCAOB has so far refused to accept the concept of regulatory equivalency, insisting instead on at least joint inspections of foreign accounting firms together with local regulators. That may change. 

Shaswat Das, an attorney with Hunton & Williams, has noted an obscure reference in a recent European Union (EU) directive that indicates the EU wants to move away from joint inspections to the US accepting regulatory equivalency. Shas observes that “it now appears that the PCAOB (with the SEC’s concurrence) has determined to proceed along a path of full, mutual reliance that may result in very few joint inspections conducted by the PCAOB in the EU during the coming years – raising questions about the continued efficacy of the PCAOB’s international inspections program.”

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