Auditors will be liable under law change
Lawmakers yesterday passed the controversial Companies Bill under which auditors will be held criminally liable if they fail to declare problems with the financial statements of a client company - but junior accountants will not face criminal liability.
After a marathon 18-month trudge through a Legislative Council committee examination, the 2,000-page Companies Bill finally passed following eight days of filibustering in Legco. It will replace the Companies Ordinance, which was first drafted in 1932. The new law introduces new rules to improve corporate governance, including the controversial criminal liability clause for auditors.
The criminal liability would be limited to a HK$150,000 fine and would not involve a jail term.
Despite intensive lobbying by the accounting sector against the clause, legislators rejected an amendment proposed by accountancy legislator Paul Chan Mo-po, who wanted the bill changed so accountants would only face criminal liability if they failed to make the declaration 'knowingly' and not 'recklessly' as stipulated in the bill.
Other lawmakers overruled Chan, saying accountants played a key role in safeguarding investors' interests, and the clause now imposes the criminal liability if accountants have acted 'knowingly or recklessly'.
'In my opinion, we had to vote for the criminal liability provision,' said legislator Andrew Leung Kwan-yuen, for the industrial sector. 'Accountants are highly respected professionals, and we trust them to safeguard the interests of shareholders.'
The approved law change now means auditors face criminal liability if their accounting report does not include a declaration that the financial statements are materially different from the auditor's accounting records, or if they cannot obtain all the information needed for the audit. Lawmakers yesterday agreed to exempt junior accountants from this clause, which will only apply to qualified accountants who sign the audit reports.
'For all young accountants, the law will not impose criminal liability on you, but obviously you must still maintain the highest integrity,' said legislator Wong Yuk-man.
The reform is a major step forward as part of a broader push to raise governance standards and increase investor protection. Separately, the Securities and Futures Commission (SFC) has proposed imposing criminal liability on sponsors of initial public offerings (IPOs) who fail in their due diligence.
Keith Pogson, president of the Hong Kong Institute of Certified Public Accountants, had mixed feelings about the law and said the institute would assist the government to draft guidelines to help auditors avoid breaching the new law.
Lawmakers yesterday also passed a provision in the Companies Bill scrapping the unpopular 'headcount rule' governing the process of taking a company private. The new law replaces it with a '10 per cent objection rule' under which 10 per cent of votes from independent shareholders is enough to stop a privatisation. 'The Companies Ordinance rewrite exercise is a challenging and highly complex project,' said Secretary for Financial Services and the Treasury Chan Ka-keung. 'This is a historic moment - we are indeed opening a new chapter in the development of company law in Hong Kong.'