Financial reporting and audit failures in transition economy: examples of auditors in China's financial market

Abstract

After the outbreak of the recent financial crisis, auditors were blamed for their inability to predict the failure of companies. The role of auditors in providing sufficient and relevant information has been at the top of the agenda for discussion in various Western countries and international organisations. In China, which has seen repeated domestic and overseas accounting scandals, there is a more fundamental problem related to the role of auditors in enhancing the accuracy and timeliness of information disclosed, in addition to the sufficiency and relevancy of information disclosed. With reference to the systems in the US and the EU and by reviewing relevant laws and regulation in China relating to auditors, mainly company law, securities regulation and banking regulation, the weak legal and regulatory system regulating the auditors in China's financial market may be one of the key factors for the above accounting issues. There are ambiguous provisions concerning external audit requirements, insufficient regulation relating to audit independence, legal constraints during the audit process, insufficient guidance on communication with regulators and limited liability risks to auditors. Auditors in China's financial market should be more proactive, and serve as more vigilant gatekeepers, for the healthy and sustainable development of China's financial market.

Notes

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3 Eg A Anand and N Moloney, “Reform of the Audit Process and the Role of Shareholder Voice: Transatlantic Perspectives” (2004) 5 European Business Organization Law Review 223; LA Cunningham, “Too Big To Fail: Moral Hazard in Auditing and the Need to Restructure the Industry Before it Unravels” (2006) 106 Columbia Law Review 1698; EL Talley, “Panel Two: Sarbanes–Oxley Accounting Issues: Cataclysmic Liability Risk among Big Four Auditors” (2006) 106 Columbia Law Review 1641.

4 Eg Jianbo Lou, “China's Bank Non-Performing Loan Problem: Seriousness and Causes” (2000) 34 International Lawyer 1147; D Hwang, Y Chen and GS Robson, “On the Informationization of Accounting Information in China: The Perspective of Accounting Information Systems and its Regulatory Framework in the USA” (2008) 4 Journal of Modern Accounting and Auditing 17.

5 J Solomon, Corporate Governance and Accountability (John Wiley, 2007), 143.

6 Technical Committee of the International Organization of Securities Commissions (IOSCO), Principles for Periodic Disclosure by Listed Entities (2010), 5.

7 See Principles for Periodic Disclosure by Listed Entities, supra n 6.

8 See JC Coffee, “Gatekeeper Failure and Reform: The Challenge of Fashioning Relevant Reforms” (2003) 84 Boston University Law Review 301, 309.

9 International Auditing and Assurance Standards Board (IAASB), Discussion Paper – The Evolving Nature of Financial Reporting: Disclosure and Its Audit Implications (International Federation of Accountants, 2011), 6.

10 JC Coffee, Gatekeeper: The Professions and Corporate Governance (Oxford University Press, 2006), 2.

11 Basel Committee on Banking Supervision (BCBS), Enhancing Bank Transparency: Public Disclosure and Supervisory Information that Promote Safety and Soundness in Banking Systems (Bank for International Settlements, 1998), 13 and 16; IAASB, Feedback Statement – The Evolving Nature of Financial Report: Disclosure and its Audit Implications (IAASB, 2012), 5.

12 See C Stephanou, Rethinking Market Discipline in Banking – Lessons from the Financial Crisis (World Bank, Financial and Private Sector Development Vice Presidency, Financial Policy Development Unit, 2010), 6–7.

13 See BCBS, Principles for Enhancing Corporate Governance (BIS, 2010), 33.

14 OECD, OECD Principles of Corporate Governance 2004 (OECD, 2004), 47.

15 Select Committee on Economic Affairs (SCEA), 2nd Report of Session 2010–11 – Auditors: Market Concentration and their Role (Vol I: Report, House of Lords SCEA, 2011), 46.

16 Eg European Commission (EC), Green Paper – Audit Policy: Lessons from the Crisis (Text with EEA Relevance) (EC, 2010); Technical Committee of the IOSCO, Auditor Communications: Consultation Report – Comment Letters (IOSCO, 2010); European Commission – Internal Market and Services Dg, Summary Report of the Responses Received to the Commission's Consultation on Country-by-country Reporting by Multinational Companies (EC, 2011); IAASB's Feedback Statement, supra n 11; IAASB, International Standards on Auditing – Reporting on Audited Financial Statements – New and Revised Auditor Reporting Standards and Relating Confirming Amendments (IAASB, January 2015).

17 Financial Stability Board (FSB) website, FSB Meets in Seoul, 20 October 2010, 3, available at: http://www.financialstabilityboard.org/wp-content/uploads/pr_101020.pdf (accessed 28 September 2015). 

18 Eg IFRS 7 – Financial Instruments: Disclosures, IFRS 12 – Disclosure of Interest in Other Entities, etc.

19 Financial Stability Forum (FSF), Report of the FSF on Enhancing Market and Institutional Resilience (FSF, 2008), 27.

20 IAASB, International Standards on Auditing, supra n 16, 7–16; International Standard on Auditing 701 – Communicating the Key Audit Matters in the Independent Auditor's Report, para 2.

21 Directive 2014/56/EU of the European Parliament and of the Council of 16 April 2014 amending Directive 2006/43/EC on statutory audits of annual accounts and consolidated accounts, Art 28.

22 IAASB Discussion Paper, supra n 9, 10. See also Joint Oversight Group of The Institute of Chartered Accountants of Scotland and the New Zealand Institute of Chartered Accountants (The Joint Oversight Group), Losing the Excess Baggage – Reducing Disclosures in Financial Statements to What's Important (The Joint Oversight Group, 2011), 2.

23 Deloitte, Swimming in Words: Surveying Narrative Reporting in Annual Reports (Deloitte, 2010), 1 and 13–14; Deloitte, Gems & Jetsam: Surveying Annual Reports (Deloitte, 2011), 14.

24 Financial Reporting Council (FRC), Thinking about Disclosures in a Broader Context: A Road Map for a Disclosure Framework (FRC, 2012), 32; European Financial Reporting Advisory Group (EFRAG), Autorite des norms Comptables (ANC) and FRC, Discussion Paper: Towards a Disclosure Framework for the Notes (EFRAG, ANC and FRC, 2012), 6.

25 Joint Oversight Group Report, supra n 22, 11–12.

26 Reporting on Audited Financial Statements, supra n 16, 5.

27 Zhang Huaiwen, “Jian lun shang ye yin hang xin xi pi lu cun zai de wen ti ji dui ce [Brief Discussion on the Existing Problems and Countermeasures of Information Disclosure for Commercial Banks]” (2010) 3 Cai jing jie [Money China] 25, 25; Luo Shuixiang, “Wo guo shang ye yin hang xin xi pi lu cun zai de wen ti ji jie jue dui ce [Problems and Solutions on Information Disclosure of the Commercial Banks in China]” (2011) 8 Bei fang jing ji [Northern Economy] 81, 81.

28 SHSE website, Zhong guo gong si zhi li bao gao (2008): Shang shi gong si tou ming du yu zi xun pi lu [Corporate Governance Report in China (2008): Transparency and Information Disclosure of Listed Companies], July 2008, 1 (Foreword) and 30, available at: http://www.sse.com.cn/researchpublications/special/c/special20081120.pdf (accessed 2 October 2015). See also SHSE website, Zheng quan wei fa wei gui cheng jie shi xiao yu zhi du cheng ben yan jiu [Studies on the Effectiveness of Disciplinary System on Securities Illegal Acts and the Cost of Disciplinary System], Issue 15, 17, available at: http://www.sse.com.cn/researchpublications/jointresearch/c/plan20061024h.pdf (accessed 28 September 2015).

29 Corporate Governance Report 2008, supra n 28, 109.

30 Ibid, 25.

31 C Gonsalves, “Do Ask, Do Tell: A New Code of Ethics for Accountants Comes into Effect this Month to Help Professionals Navigate Ethical Minefields”, A Plus, January 2011, 36. See also Ministry of Finance (MOF) website, Zhong hua ren min gong he guo cai zheng bu kuai ji xun xi zhi liang jian cha gong gao (Di 22 hao) [MOF Bulletin on Accounting Information Quality Examination (no 22)], available at: http://jdjc.mof.gov.cn/zhengwuxinxi/jianchagonggao/201302/t20130217_733445.html (accessed 28 September 2015).

32 Caixin Wang [Caixin Online], Shen Hu, Zheng Fei, Lu Yuan and Zhang Tao, “Watchdogs Growl over Concept-stock Probes”, 11 June 2012, available at: http://english.caixin.com/2012-06-11/100399298.html (accessed 28 September 2015). R Comolli, R Miller, J Montgomery and S Starykh, Recent Trends in Securities Class Action Litigation: 2012 Mid-Year Review – Settlement Bigger, but Fewer (NERA Economic Consulting, 2012), 9; PricewaterhouseCoopers (PWC), The Ever-changing Landscape of Litigation Comes Full Circle: 2011 Securities Litigation Study (PWC, 2012), 11 and 43–44.

33 PWC, 2011 Securities Litigation Study, supra n 32, 11–12 and 36.

34 MOF Bulletin no 22, supra n 31; MOF website, Zhong hua ren min gong he guo cai zheng bu kuai ji xun xi zhi liang jian cha gong gao (Di 21 hao) [MOF Bulletin on Accounting Information Quality Examination (no 21)], available at: http://jdjc.mof.gov.cn/zhengwuxinxi/jianchagonggao/201302/t20130217_733444.html (accessed 28 September 2015). See also Financial Management – Central Operational Services Unit: East Asia and Pacific Region, World Bank, Report on the Observance of Standards and Codes (ROSC) – Accounting and Auditing, PRC (World Bank, 2009), 20-21.

35 D McMahon and Shen Hong, “China Wants Local Control of Foreign Auditing Firms”, Wall Street Journal, 10 May 2012, available at: http://online.wsj.com/article/SB10001424052702304203604577395423545473012.html (accessed 28 September 2015). See also “Accounting in China: Internal Controls – Foreign Auditors in China Are Being Squeezed on All Sides”, The Economist, 19 May, 2012, available at: http://www.economist.com/node/21555574 (accessed 28 September 2015).

36 CPAB, Auditing in Foreign Jurisdictions: CPAB Special Report (CPAB, 2012) 1.

37 PCAOB website, Report on the PCAOB's 2004, 2005, 2006 and 2007 Inspections of Domestically Annually Inspected Firms, 5 December 2008, 2, available at: http://pcaobus.org/Inspections/Documents/2008_12-05_Release_2008-008.pdf (accessed 28 September 2015). See also CPAB, Meeting the Challenge “A Call to Action”: 2011 Public Report (CPAB, 2012), 4 and 10; Professional Oversight Board (POB) of FRC, Report to the Secretary of State for Business, Innovation and Skills (POB of FRC, 2012), 17 and 66–70.

38 CPAB, Meeting the Challenge, supra n 37, 4 and 10.

39 POB, Report to the Secretary of State, supra n 37.

40 Regulations Governing Foreign Banks and Joint Chinese-Foreign Banks in Special Economic Zones of the PRC (issued by the State Council (SC) on 2 April, 1985) (PRC), Art 12.

41 Eg Regulations of the PRC on the Management of Foreign-Funded Financial Institutions (issued by the SC on 25 February 1994 and effective from 1 April 1994) (PRC), Art 34; Notice Regarding Appointment of Registered Certified Public Accountants (CPAs) for Foreign Financial Institutions on Auditing (issued by the People's Bank of China (PBOC) on 30 April 1996) (PRC); Notice Regarding Reinforcement of External Audit for Foreign Banks (issued by the PBOC on 28 November 1998) (PRC); Guideline Opinions Regarding External Audit of Foreign Banks (issued by the PBOC on 6 May 1999) (PRC).

42 Cai zheng bu guan yu yin fa <GUO you qi ye nian du kuai ji bao biao zhu ce kuai ji shi shen ji zan xing ban fa> de tong zhi [Notice of MOF Regarding Issuing the Interim Measures of SOEs’ Annual Accounting Reports Audited by Registered CPAs] (issued by the MOF on 22 October 1998) (PRC), Preamble, Arts 3 and 5. These Interim Measures were repealed by Cai zheng bu guan yu gai jin he jia qiang qi ye nian du kuai ji bao biao shen ji gong zuo guan li de ruo gan gui ding [Certain Measures of the MOF Regarding Improving and Reinforcing Enterprises’ Annual Accounting Reports Audited by Registered CPAs] (issued by the MOF on 17 January 2004 and effective from 1 February 2004) (PRC), Art 1.

43 Interim Measures of SOEs’ Annual Accounting Reports Audited by Registered CPAs, supra n 42, Preamble; Certain Measures of the MOF Regarding Improving and Reinforcing Enterprises’ Annual Accounting Reports Audited by Registered CPAs, supra n 42, Art 2.

44 Interim Provisions on the Management of the Issuing and Trading of Stocks (issued by the SC on 22 April 1993) (PRC), Arts 57 and 59.

45 Sheng ci gong xi xin xi pi lu kuan li ban fa [Administrative Measures for the Disclosure of Information of Listed Companies] (issued by the CSRC on 30 January 2007) (PRC), Art 19.

46 Zhong hua ren min gong he guo zheng quan fa [Securities Law of the PRC] (promulgated by the Standing Committee of the National People's Congress (NPC) on 27 October 2005 and effective from 1 January 2006) (PRC), Art 66.

47 Zhong hua ren min gong he guo li fa fa [The Law on Legislation of the PRC] (promulgated by the NPC on 15 March 2000 and effective from 1 July 2000) (PRC), Art 79.

48 Eg Zhong hua ren min gong he guo shang ye yin hang fa [Law of the PRC on Commercial Bank] 1995, Art 56; Commercial Bank Law 2003, Art 56. In the past, Company Law only required companies to prepare annual financial reports which were subject to examination and verification. See Zhong hua ren min gong he guo gong si fa [Company Law of the PRC] (promulgated by the NPC on 29 December 1993 and effective from 1 July 1994) (PRC), Art 175 and Zhong hua ren min gong he guo gong si fa (2005 xiu ding) [Company Law of the PRC (2005 revised)] (promulgated by the Standing Committee of the NPC on 27 October 2005 and effective from 1 January 2006) (PRC), Art 165. Company Law 2005 required companies to prepare the annual financial reports and the reports were required to be audited according to laws, regulations and rules. The newly revised Company Law 2014 requires company to be audited by an accounting firm according to the law, Art 164. Interim Measures for the Information Disclosure of Commercial Banks (promulgated by the PBOC on 15 May 2002) (PRC), Art 6; Measures for the Information Disclosure of Commercial Banks (promulgated by the China Banking Regulatory Commission (CBRC) on 3 July 2007) (PRC), Art 6; CSRC Administrative Measure, supra n 45, Art 19; Financial Rules for Financial Enterprises (issued by the MOF on 7 December 2006 and effective from 1 January 2007) (PRC), Art 58.

49 Zhong hua ren min gong he guo xian fa [Constitution of the PRC (2004)] (revised by the NPC on 14 March 2004) (PRC), Art 91 which stipulates that revenues and expenditures of financial organizations are supervised by the NAO; Zhong hua ren min gong he guo shen ji fa (2006 xiu zheng) [Audit Law of the PRC (Revision 2006) (promulgated and revised by the Standing Committee of the NPC on 28 February 2006) (PRC), Arts 2, 18 and 21 which stipulates that the NAO performs audit supervision to the revenues and expenditures of SOCBs. See also Jiang Jianhua, “Lun ru shi hou jin rong shen ji dui shang ye yin hang de jian du [Discussion about the Supervision of the Financial Audit of Commercial Banks]” (2003) 11 Jin yong zong heng [Financial Perspectives Journal] 40, 40; Qin Huizhong, “Yin ru she hui zhong jie ji gou yu yin hang jian guan” [The Introduction of Social Intermediary Organizations Involved in Banking Supervision] (2003) 19 Zhong guo jin rong [China Finance] 29, 30; Wang Jingfang, “Lun wo guo shang ye yin hang wai bu shen ji zhi du he mo shi de chuang xin” [On External Auditing System and Model Innovation by Our Commercial Banks] (2004) 7 Jin rong lun tan [Finance Forum] 57, 58–59.

50 Jiang Jianhua, supra n 49, 41.

51 See International Monetary Fund (IMF) Monetary and Capital Markets Department and The World Bank Financial and Private Sector Development Vice Presidency East Asia and Pacific Region Vice Presidency, Financial Sector Assessment Program PRC: Basel Core Principles for Effective Banking Supervision – Detailed Assessment of Observance (IMF and World Bank, 2012), 90.

52 See Directorate General for Internal Market and Services (DGIMS), Consultation on Control Structures in Audit Firms and Their Consequences on the Audit Market – Summary Report (DGIMS, 2010), 7.

53 See “Mainland Emerges as Rotation Laboratory”, A Plus, August 2013, 19.

54 CICPA website, Zhong guo zhu ce kuai ji shi xie hui guan yu fa bu <2012 nian kuai ji shi shi wu suo zong he ping jia qian bai jia zi xun> de tong gao [CICPA released Notice of “the 2012 Comprehensive Evaluation Information of Top 100 Accounting Firms”], available at: http://www.71cpa.org.cn/tztg/201207/t20120730_34855.html (accessed 28 September 2015).

55 PBOC website, Wo guo shang shi gong si 2010 nian zhi xing qi ye kuai ji zhun ze qing kuang fen xe bao guo [Implementation of Accounting Standards Analysis Report for China's Listed Companies in 2010], 2, available at: http://kjs.mof.gov.cn/zhengwuxinxi/diaochayanjiu/201109/t20110928_597075.html (accessed 28 September 2015).

56 IOSCO, Objectives and Principles of Securities Regulation (IOSCO, 2010), 9; IOSCO, Methodology for Assessing Implementation of the IOSCO Objectives and Principles of Securities Regulation (IOSCO, 2011), 120.

57 IOSCO, Methodology, supra n 56.

58 See Coffee, supra n 10, 286.

59 Certified General Accountants website, Recovery of the accounting profession Post-Enron, 2, available at: http://www.cga-pdnet.org/Non_VerifiableProducts/ArticlePublication/RecoveryAccountingProfession/RecoveryAccountingProfession_p2.pdf (accessed 28 September 2015).

60 Public Law 107-204 of 30 July 2002, Preamble and ss 201–09.

61 Public Law 107-204 of 30 July 2002, s 201.

62 Public Law 107-204 of 30 July 2002, s 203.

63 See PCAOB website, JR Doty, “Statement on Public Meeting on Auditor Independence and Audit Firm Rotation”, 18 October 2012, available at: http://pcaobus.org/News/Speech/Pages/10182012_DotyOpeningStatement.aspx (accessed 28 September 2015); PCAOB website, “Concept Release on Auditor Independence and Audit Firm Rotation, Notice of Roundtable”, PCAOB Release No 2011-006, 16 August 2011, 2, available at: http://pcaobus.org/rules/rulemaking/docket037/release_2011-006.pdf (accessed 28 September 2015).

64 European Commission, Commission Staff Working Paper Impact Assessment: Accompanying the Document Proposal for a Directive of the European Parliament and of the Council amending Directive 2006/43/EC on Statutory Audits of Annual Accounts and Consolidated Accounts and a Proposal for a Regulation of the European Parliament and of the Council on Specific Requirements Regarding Statutory Audit of Public-interest Entities (EC, 2011), 123. See also J Le Vourc'h and P Morand, Final Report: Study on the Effect of the Implementation of the Acquis on Statutory Audits of Annual and Consolidated Accounts Including the Consequences on the Audit Market (ESCP Europe, 2011), 7.

65 DGIMS Report, supra note 52, 19.

66 For rotation of audit partner, in the EU, see Directive 2006/43/EC of the European Parliament and of the Council of 17 May 2006 on Statutory Audits of Annual Accounts and Consolidated Accounts, amending Council Directives 78/660/EC and 83/349/EEC and repealing Council Directive 84/253/EEC, Art 42; Regulation (EU) No 537/2014 of the European Parliament and of the Council of 16 April 2014 on specific requirements regarding statutory audit of public-interest entities and repealing Commission Decision 2005/909/EC, Art 17.

67 EC, Commission Staff Working Paper, supra n 64, 122–23 and 171.

68 FRC, The UK Corporate Governance Code (FRC, 2012), 19.

69 Ibid, 4.

70 Regulation No (EU) 537/2014, supra n 66.

71 Le Vourc'h and Morand, supra n 64, 8.

72 Ibid, 65.

73 See FRC website, APB Ethical Standards 5 (Revised) – Non-audit Services Provided to Audit Entities, December 2011, available at: https://www.frc.org.uk/Our-Work/Publications/APB/ES-5-(Revised)-Non-audit-services-provided-to-audi.pdf (accessed 28 September 2015).

74 Regulation No (EU) 537/2014, supra n 66, Art 5.

75 International Ethics Standards Board for Accountants, Handbook of Code of Ethics for Profession Accountant: 2015 Edition (IFAC, 2015).

76 See Reporting on Audited Financial Statements, supra n 16, 9.

77 CPAB Report, supra n 37, 9.

78 MOF website, Zhu ce kuai ji shi hang ye xing zheng guan li diao yan bao gao [Administrative Management Research Report on the CPA Profession] available at: http://kjs.mof.gov.cn/zhengwuxinxi/diaochayanjiu/ (accessed 28 September, 2015).

79 CPAB Report, supra n 37, 9.

80 Administrative Management Research Report on the CPA Profession, supra n 78.

81 Notice of the MOF on Issuing the Measures for Financial Enterprises to Select and Employ Accounting Firms by Bidding (for Trial Implementation) (issued by the MOF on 3 December 2010 and effective from 1 January, 2011) (PRC), Art 30; Yin hang ye jin rong ji gou wai bu shen ji jian guan zhi yin [Guidelines on External Audit for Financial Institutions] (issued by the CBRC on 11 August 2010) (PRC), Art 11.

82 MOF Notice on Accounting Firms, supra n 81, Arts 5, 28 and 29.

83 “Mainland Emerges as Rotation Laboratory”, supra n 53.

84 Law of the PRC on CPAs (promulgated by the Standing Committee of the NPC on 31 October 1993 and effective from 1 January 1994) (PRC), Art 15.

85 Notice of the MOF, CSRC, NAO, CBRC and China Insurance Regulatory Commission (CIRC) on Issuing the Basic Internal Control Norms for Enterprises (promulgated by the MOF, CSRC, NAO, CBRC and CIRC on 22 May, 2008 and was effective from 1 July, 2009) (PRC), Art 10.

86 CBRC Guidelines on External Audit, supra n 81, Art 12.

87 Zhong hua ren min gong he guo bao shou guo jia mi mi fa [Law of the PRC on Guarding State Secrets] (Standing Committee of the NPC revised on 29 April 2010 and effective from 1 October, 2010) (PRC), Arts 2 and 9.

88 Ibid, Art 9(7).

89 Guan yu jia qiang zai jing wai fa xing zheng quan yu shang shi xiang guan bao mi he dang an guan li gong zuo de gui ding [Measures on the Strengthening of the Works of Confidentiality and File Management for Overseas Securities Issued and Listing] (issued by the CSRC, National Administration for the Protection of State Secrets and the State Archives Administration of the PRC) (PRC), Art 6.

90 Ibid, Art 6.

91 Law of the PRC on Guarding State Secrets, supra n 87, Arts 3, 48 and 49; Measures on the Strengthening of the Works of Confidentiality, supra n 89, Art 9.

92 See Shen Hu, Zheng Fei, Lu Yuan and Zhang Tao, supra n 32.

93 Ibid.

94 SCEA Report, supra n 15, 40.

95 SEC website, Deloitte Touche Tohmatsu Certified Public Accountants Ltd, Release No 66948, 9 May 2012, 1–3, available at: http://www.sec.gov/litigation/admin/2012/34-66948.pdf (accessed 28 September 2015).

96 Ibid.

97 See M Rapoport, SEC, “Big Four Accounting Firms in China Settle Dispute: Deal Over Refusal to Turn Over Audit Documents Lifts Threat of Suspension”, Wall Street Journal, 6 February 2015, available at: http://www.wsj.com/articles/sec-big-four-accounting-firms-in-china-settle-dispute-1423237083 (accessed 28 September 2015).

98 PCAOB website, Consideration of Registration Applications From Public Accounting Firms in Non-US Jurisdictions Where There Are Unresolved Obstacles to PCAOB Inspections, 7 October 2010, 3, available at: http://pcaobus.org/International/Inspections/Documents/Registration_of_Non-US_Firms.pdf (accessed 28 September 2015). See also “China Said to Discuss Allowing SEC Probes of Mainland Firms for First Time”, Bloomberg, 5 July 2011, available at: http://www.bloomberg.com/news/2011-07-05/china-said-to-discuss-allowing-sec-probes-of-mainland-firms-for-first-time.html (accessed 28 September 2015).

99 “China Said to Discuss Allowing SEC Probes”, supra n 98.

100 Ibid.

101 PCAOB website, Registered Firms Not Yet Inspected Even Though Four or More Years Have Passed Since Issuance of an Audit Report While Registered (as of 30 June 2015), available at: http://pcaobus.org/International/Inspections/Pages/NotYetInspected.aspx (accessed 28 September 2015).

102 SFC website, “SFC Commences Legal Proceedings against E&Y over Access to Accounting Records”, 27 August 2012, available at: http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/?year=2012&month=8 (accessed 28 September 2015).

103 Securities and Futures Ordinance, s 185(1).

104 Securities and Futures Ordinance, s 185(1).

105 Securities Exchange Act of 1934, s 10A.

106 See HM Treasury, A New Approach to Financial Regulation: Securing Stability, Protecting Consumers (HM Treasury, 2012), 39.

107 FSA and FRC, Enhancing the Auditor's Contribution to Prudential Regulation (Discussion Paper 10/3, FSA and FRC, 2010), 30.

108 Ibid, 29–30.

109 Regulation No (EU) 537/2014, supra n 66, Art 12.

110 Financial Conduct Authority (FCA), Finalised Guidance: Code of Practice for the Relationship between the External Auditor and the Supervisor (FCA, July 2013), 2–5. The above replaced the Code of Practice issued by the FSA in May 2011.

111 Financial Services and Markets Act 2000, ss 342 and 343; FCA, Code of Practice, supra n 110, 3.

112 HM Treasury, supra n 106.

113 PCAOB website, PCAOB Release No 2012-004, 15 August 2012, 2–3, available at: http://pcaobus.org/Rules/Rulemaking/Docket030/Release_2012-004.pdf (accessed 28 September 2015).

114 Ibid, supra n 113, 10–11.

115 FRC, Guidance on Audit Committees (FRC, 2012), 10–16.

116 Directive 2014/56/EU, supra n 21, Art 39.

117 Ma Qiaozhen, “Zhong guo jin rong gao guan fu bai wen ti yan jiu ji dui ce qian xi” [Brief Analysis Regarding the Study and Solution on the Scandals of the Senior Management of China's Finance] (2006) 6 Jin rong jing ji [Finance & Economy] 129, 129.

118 CAS No 1613 – Relationship with Bank Regulator (issued by MOF on 15 February 2006 and effective from 1 January 2007) (PRC), Art 22 and chs IV–V.

119 Ibid.

120 CBRC Guidelines on External Audit, supra n 81, Art 17.

121 Ibid, Art 16.

122 Shang shi gong si zhi li zhun ze [Codes on Corporate Governance for Listed Companies] (promulgated by the CSRC and the State Economic and Trade Commission on 7 January 2002) (PRC), Art 54.

123 Ibid, Art 52.

124 London Economics in association with Professor Ralf Ewert, Study on the Economic Impact of Auditors’ Liability Regimes (MARK/2005/24/F): Final Report to EC-DG Internal Market and Services (London Economics in association with Professor Ralf Ewert, Goethe University, Frankfurt am Main, Germany, 2006), xli.

125 Ibid, 143.

126 Ibid, 143–44.

127 MOF Bulletin No 22, supra n 31.

128 Notice of the MOF and the CSRC on Adjusting the Application Conditions of Accounting Firms for Securities Qualifications (issued by the MOF and the CSRC on 21 January 2012) (PRC); MOF Notice on Accounting Firms, supra n 81, ch II.

Additional information

Notes on contributors

Heather Lee

Heather Lee ([email protected] is Assistant Professor, Department of Accountancy (Law & Tax Team), Hang Seng Management College, D719, Block D, Hang Shin Link, Siu Lek Yuen, Shatin, New Territories, Hong Kong.