The web has been ablaze today with the news that Tsingtao Brewery
Co. Ltd. (HKSE 168) has asked
shareholder approval to fire PricewaterhouseCoopers in order to “improve
efficiency and reduce the costs of disclosure”. While this captured everyone’s attention,
including mine, I then read who the new auditor is proposed to be:
PricewaterhouseCoopers Zhong Tian. Because PwC operates as an integrated firm in
Hong Kong and the Mainland, nothing significant is changing. PwC Zhong Tian is
PwC’s member firm on the mainland, and the Qingdao office of PwC Zhong Tian has
been doing the audit since the client was acquired with PwC’s acquisition of the
China and Hong Kong assets of Arthur Andersen in 2002.
Previously the Hong Kong Stock Exchange generally required that a Hong Kong CPA sign accounts of listed companies and required that the accounts be prepared under Hong Kong Financial Reporting Standards (HKFRS). On October 12, 2010 the Hong Kong Stock Exchange agreed to allow Mainland issuers to file accounts using Chinese Accounting Standards (CAS) and to use approved Mainland auditors. China had pushed for these rules as a means to allow their local firms a chance to compete for H-share work, and this shift from PwC Hong Kong to PwC Qingdao will disappoint those firms who had hoped to get a shot at the work.
Tsingtao previously had to prepare two sets of accounts – one under CAS and another under HKFRS. HKFRS have followed International Financial Accounting Standards (IFRS) since 2005. China had substantially converged its standards with IFRS by 2007. As a result, Tsingtao reported in its 2009 financial statements that there was no difference in the amounts of assets or profits between the accounts they prepared under CAS and HKFRS.
What does this mean to investors? Probably nothing. The same team that audited Tsingtao before likely continues, but they will only have to issue one report. Although Tsingtao says there is no difference in the results between CAS and IFRS, the disclosures will be slightly different. PwC likely had to assign a Hong Kong partner to sign the HKFRS accounts and that additional review might have added a little more comfort, but PwC’s internal processes already provide for second partner review. Both PwC and Tsingtao will save quite a bit of effort getting the financial statements done and I expect Tsingtao is getting a fee reduction.
What will be really interesting is if some of the larger H-share companies dump the Big Four for second tier auditors like BDO or for large local firms like Shinewing. That would shake up the market.