New measures to govern audit service for SOEs, listed companies

Chinese financial authorities on Thursday issued new rules on the service of accounting firms for state-owned enterprises (SOEs) and listed companies, including an eight-year maximum service time for accountants employed by SOEs, and enhanced checks on data security of accountants, so as to improve audit quality and promote fair competition.

The move came after multiple accounting firms, including Deloitte, were previously disciplined for serious deficiencies in its audit of Chinese companies.

Experts said that the move was a significant reform in China's stepped-up audit sector regulation to ensure the authenticity of information disclosure, while tackling some chronic issues such as collusion.

The rules apply to all accounting firms operating in China, regardless of they are domestic or foreign -- a strong rebuttal to what some foreign media hyped as China's plan to "phase out" global accounting service.

According to the new rules, SOEs including state-controlled listed firms, under normal conditions, should not employ the same accounting firm for more than eight consecutive years.

The measures were jointly issued by China's Ministry of Finance (MOF), the State-owned Assets Supervision and Administration Commission, and the China Securities Regulatory Commission (CSRC).

The new regulation is to ensure the stability of cooperation between accounting firms and enterprises, while tackling issues like collusion, which is an important reform measure to strengthen accounting supervision in China, Dong Shaopeng, a senior research fellow at the Chongyang Institute for Financial Studies at Renmin University of China, told the Global Times on Thursday.

The measures also call on SOEs and listed firms to strengthen reviews of data security management for accounting firms during the selection and hiring processes. The measures require companies to have dedicated clauses in contracts, and enhance security of confidential and sensitive information.

Accounting firms should fulfill their obligations of information security protection, and process information in accordance with the regulations.

As China enters a new stage of development, it is necessary that the country should strike a delicate balance between development and security, analysts said. That means all accounting firms should abide by Chinese laws, including data security stipulations.

Both Chinese and foreign firms need to follow Chinese regulations when auditing domestic firms, and the security of sensitive data should be handled in accordance with the law through proper management, Dong said.

The Global Times reported in February that some of the four biggest international accounting firms - PwC, KPMG, Ernst & Young and Deloitte & Touche - have won bids to provide accounting services to Chinese SOEs.

The authenticity of information disclosure will also be improved while enterprises' financial accounts and status can be better handled, Xi Junyang, a professor at the Shanghai University of Finance and Economics, told the Global Times on Thursday.

Previously, accounting firms and enterprises may have had long-term "tacit agreements," leading to lackluster requirements for the auditing process and resulting in inaccurate information disclosures, Xi noted.

The new rules also clarify the detailed responsibilities, such as policies, processes and related internal control systems for the selection and engagement of accounting firms.

In recent months, Chinese regulators have moved to step up oversight of many accounting firms.

In March, the Ministry of Finance announced a fine of 800,000 yuan ($115,750) for China Huarong Asset Management and its seven subsidies, and imposed a fine of nearly 212 million yuan on its auditor Deloitte along with other penalties, after an investigation uncovered illegal activities including audit deficiencies.

And, China Securities Regulatory Commission fined accounting firm Moore Stphens Da Hua CPAs in March for disclosing false records of Zoneco's annual financial report in 2016 and failing to exercise diligence in the year's auditing process.