New rules make it all add up

PUBLISHED : Sunday, 16 February, 1997, 12:00am
UPDATED : Sunday, 16 February, 1997, 12:00am

HONG KONG auditors will soon have to abide by stricter rules and a more extensive set of standards to judge whether a company's financial statements give a 'fair and true view'.

After three years preparing the new standards, the Hong Kong Society of Accountants (HKSA) plans to issue a total of 19 new mandatory standards for auditors in the next few weeks.

The new standards are based on recommendations from the International Federation of Accountants, which issued wider-ranging rules for auditors in 1994.

The HKSA at present has only two mandatory standards and a host of guidelines.

The first mandatory standard outlines audit approach.

One page long, it does little more than stress how audits must be impartial and should assess the accounting systems.

The second mandatory principle, on audit reporting, was updated in late 1993, and merely outlines what an auditors' report should look like.

Under the new standards, auditors assessing financial statements will have more to look out for.

The standards come into force for companies reporting year-ends of September 30 this year or after, and fill up wide gaps in the present system.

According to James Fawls, director of professional standards at the Hong Kong Society of Accountants, the principles cover not just introductory matters and reporting, but provide principles for internal risk and controls.

The standards provide procedures to give more effective tests for auditing the internal controls of companies; more emphasis on understanding the business environments that companies operate in and clearer models for assessing the risk of error in accounts.

For the public, these new standards define what an audit should tell them.

Richard George, senior manager at the technical department of Deloitte Touche Tohmatsu, said: 'You have a point of reference that tells you what an auditor should have done.

'It also puts the onus on auditors to explain why they did not carry out certain things.' Auditors will find it easier to detect discrepancies in a company's accounts. The HKSA hopes this will result in higher-quality audits.

If members of the society fail to obey the standards, the HKSA can take disciplinary action.

'We have a review monitoring body, which will inspect audits on a random basis,' Mr Fawls added.

But what about claims that the new standards are a political move, a bid to ensure that Hong Kong auditing standards and guidelines shed their British characteristics in the run-up to the handover? Auditors say it is hard to believe that, when the British themselves have been changing their standards and moving them in line with international standards over the past couple of years.

Even with the changes, audit-reporting standards, for instance, are still close to British standards.

That is not to say everyone in the auditing profession will greet the new standards with open arms.

All the HKSA's 12,000 members have been sent drafts of the standards, which they have been given a few months to comment on.

Their suggestions were passed on the HKSA's auditing standards committee, which is made up of representatives from small and large firms, as well as bankers.

After deliberations, the committee came up with the final standard.

But many of the Big Six firms, for instance, already follow an international audit approach, based on published international standards.

Although few companies in Hong Kong have a September 30 year end, giving firms more time to adjust to the new standards, smaller auditing companies are bound to feel the pressure of the changes.

'To be fair, they will have to do more work up front to change their procedures and programmes,' Mr Fawls said.

'But we are looking to help them with seminars, for instance.' In the end, the point to keep in mind is that these are auditing - not accounting - standards.

As such, they affect only those whose job it is to verify that stated assets and liabilities of a company's financial records match actual assets and liabilities.

But they do make standards clearer.

In a field known for its complexity, the rules, it is argued, make life for auditors much simpler.