Source: CD    Published: 2023-11-15

China will strengthen regulation over accounting firms' data management, a move that experts said will bolster the country's data security, safeguard national security better and facilitate cross-border auditing cooperation.

China unveiled a new set of draft rules on Monday and is seeking professional opinion until Dec 11.

According to the draft rules, under certain conditions, China will carry out a cybersecurity review of data processing activities of accounting firms that audit sectors crucial to the Chinese economy or people's livelihoods.

The draft rules also urged the authorities concerned to implement full-range supervision and inspections, and continuously strengthen daily supervision of accounting firms undertaking audit of businesses in important sectors like finance, energy, telecommunications, transportation, science, technology and defense.

"The new rules are a positive sign for China's national data security. Ensuring data confidentiality is an innate and globally accepted requirement for auditors providing services to clients," said Liu Feng, a professor at Xiamen University in Fujian province.

"Only when accounting firms regard data security as important as that of audit risk prevention can security of audit data not become an issue," Liu said. He is also director of the Center for Accounting Studies of Xiamen University and a member of the Advisory Council of the International Financial Reporting Standards.

The new rules stipulate the protocols for handling issues related to sending audit work papers overseas, he said.

Liu Ying, a researcher at the Chongyang Institute for Financial Studies at the Renmin University of China, said leaking data under the name of auditing is not acceptable.

"The draft rules have clarified (certain data-related practices of) accounting firms and applicable activities. The approval and implementation of the rules will likely be welcomed as they provide clear dos and don'ts for the auditing industry," Liu said.

The audit work papers generated within the Chinese borders should be stored within the Chinese borders and for those that need to be sent overseas, approval procedures in accordance with relevant laws and rules must be followed, the draft rules state.

Accounting firms must conduct multiple reviews on sending audit work papers overseas, and take necessary measures to strictly carry out management responsibility on the confidential and sensitive information in the audit work papers, the draft rules stipulate.

They also say that accounting firms must classify data on different scales of importance to apply differential management protocols. They also make specific provisions on aspects like data transmission, encryption and backup, and lay down specific requirements for data management means, data storage methods and data log management.

Last year, the China Securities Regulatory Commission, the Ministry of Finance and the United States Public Company Accounting Oversight Board signed an audit oversight cooperation agreement.

The agreement established a cooperation framework in line with the authorities' respective laws and regulatory mandates and set out specific arrangements for conducting inspections and investigations by both sides of relevant audit firms within the jurisdiction of both sides.

Chinese and US regulators will both assist with the inspections and investigations of relevant audit firms conducted by the other side.