The Chinese Securities Regulatory Commission (CSRC) will in 2015 drastically change the way how IPO´s take place in China. The government will step back, leaving decision making to the market. To facilitate that change, China needs an audit regulator, writes accounting professor Paul Gillis at his weblog.
As regulators step back, it is critical that other institutional players, particularly auditors, lawyers, and investment bankers step up. They will become the prin-cipal gatekeepers to the market. Without increased professionalism by these players, the Chinese stock markets could become increasingly dangerous for investors.
Too many auditors have been willing to sign off on numbers that magically meet CSRC IPO requirements. The Big Four are not major players in the domestic IPO market, which is dominated by local firms. Although some large local firms have emerged, they do not dominate the local stock markets like the Big Four dom-inate most markets around the world. Hopefully, investors will start paying more attention to the audit firms selected by Chinese concerns, and that will lead to larger, higher quality accounting firms dominating the market.
The CSRC has promised to tighten post-IPO supervision and to punish those who violate the rules. That is laudable, but the devil will be in the details. For the auditors, I suggest that China put in place an independent audit regulator that would be eligible to join the International Forum of Independent Audit Regulators (IFIAR), a group that now includes regulators in 51 jurisdictions.Hong Kong is currently deciding on necessary reforms that would allow it to join IFIAR. An independent audit regulator with the funding to do its job and the willingness to take on recalcitrant accounting firms is now the global standard for securities markets.
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