Jamie Allen is the founding general secretary of the Asian Corporate Governance Association. He spoke with China Economic Review about the state of corporate governance in Greater China and what it means for the Hong Kong market and for the Hong Kong financial services industry.
Q: The Hong Kong exchange decided last year to allow mainland firms listed on its board to file financial statements signed by mainland-only audit firms. What are your concerns about the change?
A: I’m concerned about whether the quality of work done by the mainland audit firms will be as high as that done in Hong Kong. Some of the firms are joint ventures with the Big Four [accounting companies]. So to some extent, they probably will be of comparable quality. But I think there is an issue of how these mainland firms prove that the quality of the work they’re doing is comparable to what you would expect from a global firm or a Hong Kong audit firm.
Q: What is the scope of Hong Kong regulators to deal with poor quality mainland audits?
A: If there are problems with any of the [mainland] audits, then regulators in Hong Kong have very little jurisdiction over these mainland audit firms. Essentially, it’s going to be the Ministry of Finance in Beijing that takes the lead in enforcement, so there’s concern about potential loss of regulatory authority in Hong Kong. The basic questions are: If there is a problem, how is it all going to play out from a regulatory perspective? How will investors know if the action they say is taken has actually been done?
Q: If there are corporate governance concerns, won’t markets simply apply a discount to mainland equity prices?
A: If it’s signed by a joint venture with one of the Big Four, investors probably won’t apply a discount. But if it’s a mainland audit firm they possibly will. The reason I say “possibly” and not “probably” is that how much investors know about audits is a bit of a gray area, in the sense that most auditors don’t talk to shareholders and most shareholders don’t talk to auditors. There’s almost no dialogue between the two sides, even though the auditor is ostensibly working for the shareholder. And there’s almost no mechanism by which a shareholder can actually talk to an auditor and ask questions.
Q: All things considered, is China’s corporate governance improving?
A: I would say companies interested in getting better are improving. But I’m not sure it’s getting better among private companies. Anecdotally, it seems to be getting worse among private companies – there’s just been so many cases in the past few years. Some of this may be related to the financial crisis, but some of it may just be people trying to get easy money. So it’s tough to say whether it’s getting better or worse. But certainly among some of these private companies it doesn’t seem to be getting better.