The UK’s Financial Reporting Council (FRC), which in addition to overseeing UK auditors, is also responsible for the oversight of Third Country Auditor(s) (TCAs) who audit annual financial statements of entities which issue publicly traded securities, has proposed a temporary rule change for Chinese companies seeking to list in London. The proposal seeks to allow auditors of China‑registered entities to apply Chinese Standards on Auditing (CSAs) rather than the International Standards on Auditing (ISAs) typically applied in the UK in an attempt to attract Chinese companies to list on the London bourse.
Brief summary table of differences between CSAs and ISAs
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CSAs |
ISAs |
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Standard setting bodies |
Formulated by the Chinese Institute of Certified Public Accountants (CICPA) in accordance with the Law of the People's Republic of China on Certified Public Accountants, under the regulation and approval by the Ministry of Finance (MoF). Including standards on: assurance engagements, audits, review engagements, other assurance engagements, related services, firms' quality controls. |
International Auditing and Assurance Standards Board (IAASB) operating under the International Federation of Accountants (IFAC). |
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Convergence status |
Formally converged with international standards, the CSA were converged with the 2010 ISA with limited additions. The CICPA completed a revision of certain auditing standards in 2015 to incorporate new and revised auditor reporting standards released by the IAASD standards of which were approved by the MoF. |
Global benchmark, no local adaptation required. |
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Approach |
Principles-based but often more prescriptive due to local regulation needs. |
Principles-based, globally applied. |
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Local Adaptation |
Includes China-specific guidance, aligned with PRC law and regulatory framework, such as being subject to Supervision Regulations on Audit of Financial Statements of Listed Companies released by the CICPA. |
No jurisdiction-specific rules, globally uniform. |
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Regulatory environment |
Higher, more direct and nuanced government involvement, CICPA which regulates the profession under the guidance of MoF. |
Applied within each country's enforcement regime. |
This shift will have implications for advisors and auditors serving clients across Hong Kong, mainland China, and the United Kingdom, particularly those looking to list on the London Stock Exchange.
A Shift Aimed at Attracting Chinese Listings in London
TCAs registered with the FRC are currently permitted to audit the financial reports of UK-listed entities but must adhere to ISAs in so doing. At the request of the MoF, the FRC previously undertook a review of CSAs in 2021-22 but concluded that CSAs were not equivalent to ISAs and has not accepted the application of CSAs.
It is proposed that the amendment apply only to China‑registered companies seeking to raise capital in London under the cross-border securities trading programme (Stock Connect programme), a framework agreed under a memorandum of understanding between the Financial Conduct Authority and the China Securities Regulatory Commission. The framework allows Chinese companies to issue global depositary receipts for trading on the London Stock Exchange (while UK entities may issue Chinese Depository Receipts for trading on the Shanghai and Shenzhen exchanges). This consultation addresses a perceived barrier to China-registered companies in having to apply ISAs in their audits which has been seen to have discouraged them from choosing the UK as a listing venue.
The FRC emphasises that the changes include robust safeguards to protect investors and market integrity including by:
- limiting their time and scope;
- requiring transparency by the issuer
- continued TCA registration and ongoing supervision of TCAs by the FRC; and
- requiring clear disclosures on the auditing standards that have been applied.
Market Opinion: Opportunity Meets Risk
The proposed amendments have, on the one hand, been welcomed by some as a necessary opening of access but on the other it has given reason for concern over the application of unfamiliar standards, the effects of which would not be immediately apparent.
Proponents argue that, with global exchanges aggressively courting Chinese issuers, London must remain an attractive option and that London risks losing listings to other jurisdictions unless barriers to entry are lowered. The FRC frames the proposal as supporting the wider government objective of boosting UK economic growth, encouraging the flow of capital, and overall strengthening London’s global market competitiveness.
Criticism has focused on the potential impact on audit quality and on the challenges of understanding disclosures by China‑based issuers. Some cite examples of previous accounting scandals which have plagued Chinese firms listed on other bourses as reasons to be wary. Sino‑Forest Corporation, which was previously listed on the Toronto Stock Exchange, collapsed in 2012 after Canadian regulators concluded that it had engaged in “deceitful or dishonest conduct” by inflating both its revenues and asset values. A comparable case emerged in 2020 when Luckin Coffee was fined by US regulators after admitting that reported revenue had been fabricated.
Critics argue that unfamiliar standards may expose UK investors to opaque accounting practices and undermine long‑term trust in the UK market. These perspectives underscore the need for the FRC’s proposed safeguards and may shape the consultation’s outcome.
With the outcome of the FRC consultation still unknown, stakeholders across the audit, legal, and capital markets ecosystems will be watching closely to see whether any final proposal strikes an appropriate balance between, on the one hand, expanding market accessibility for China-registered companies and implementing safeguards to protect investors, and on the other addressing the associated legal and practical challenges. Whatever the outcome, legal and financial advisors will need a clear understanding of the resulting requirements so that they can properly advise potential issuers on how to take advantage of the increasing openness of capital markets in the UK, China and globally, and support their efforts to raise capital and expand internationally.
