Called to account

PUBLISHED : Friday, 08 February, 2002, 12:00am
UPDATED : Friday, 08 February, 2002, 12:00am


Q: HOW MANY accountants does it take to change a light bulb? A: What kind of answer did you have in mind? An old joke, but one unlikely to provoke an indignant rebuff these days.

The phrase 'crisis of confidence' is not normally associated with the accountancy profession. Such is the effect of Enron. Stocks are going through the floor at the mere whiff of a questionable audit.

In the United States, the scandal has brought the fundamentals of accounting into question. An overhaul of its book-keeping system is inevitable.

The adage that accountants, given time, can get around any rule, will be confronted.

The debacle has also resurrected debate on conflicts of interest between the audit process and the provision of other services to clients. Just how independent are the auditors?

Take a recent tender for an audit in Hong Kong. A large firm riled its competitors when it put in a bid that barely topped US$100,000 for a job that should have cost well over US$1 million.

The client in question was at the extreme high-end of the finance market.

One competitor said: 'They went in with such a low figure on condition they would make money on other things. If they tell them they are naughty boys on the audit they will lose US$30 million on another contract.'

Gone are the days when an accountant simply counted beans. An accountancy firm's revenue is more diverse these days: audit partners may be judged on their ability to bring in more work from clients. Dependence on consultancy income is growing.

To address such concerns, the Hong Kong Society of Accountants (HKSA), the industry regulator, this week said it was proposing to bar accountants from acting as both auditor and consultant to the same listed company.

Society president Alvin Wong Tak-wai said he hoped the ban, which echoes a similar proposal in the US, could be added to the society's code of ethics within six months.

Charles Grieve, director of accounting policy at the Corporate Finance Division of the Securities and Futures Commission, said: 'There will always be conflicts regardless of what happens. In reality, any partner who has a major audit client doesn't want to lose them.'

He said a row with a client would not go down well with the other partners.

'The concern is that these pressures can be amplified where an audit is only part of the total income,' Mr Grieve said.

'Someone who is getting paid a fee of HK$5 million but has another HK$50 million fee income coming in is under pressure.'

There comes a point where the sheer size of the other fees in relation to the audit becomes ridiculous.

'You have to draw a line. There are no blacks and whites. There are shades of grey in this. You have to consider where to draw the line,' he said.

The US sought to draw a clear line last year when the Securities Exchange Commission proposed a curb on the scope of non-audit work firms could carry out. After much resistance from the profession, the rules were watered down.

'No one kids themselves it's only about appearance. What is fundamental is that the market has confidence in the quality of the work. Market confidence has taken a battering,' Mr Grieve said.

An auditor's duty - and legal responsibility - is to report to shareholders. An auditor is obliged to report any misdeeds. To resign is considered unethical.

One possible escape route for auditors in a tight spot in the SAR is the Securities Bill plodding through the Legislative Council. A provision gives auditors immunity if they turn in a fraudulent client.

'It means they can - if they wish - blow the whistle,' Mr Grieve said.

The HKSA will include new ethics guidelines in a consultation paper to be released this year. It is expected to follow rules drafted by the International Federation of Accountants (IFAC) in April last year.

The IFAC paper identified risk categories and broad categories of safeguards to combat these risks.

HKSA vice-president David Sun Tak-kei is sceptical about perceived conflicts of interest.

'In Hong Kong generally consultancy work is a small part of the firms' business . . . the opportunity for such a level of conflict would be small,' he said.

US accountants were dealing with more sophisticated business transactions, he said, giving a larger potential for error. 'Any time new transactions are being devised by investment banks, it will take some time for the accountants to come up with some sort of measurement as to how to measure these things and account for these things,' Mr Sun said.

He stressed that Asia was 'not as sophisticated'.

Yet Hong Kong is no stranger to controversy. A number of high-profile corporate failures during the Asian financial crisis raised questions about the quality of audits.

Decisions by the HKSA in particular to probe the audits of Cosco International Holdings, GKC Holdings and Guangnan (Holdings) led to a string of legal challenges by major accountancy firms.

Ernst & Young and Deloitte Touche Tohmatsu in particular fought hard to stymie investigations, objecting to the HKSA's scope and methodology. Investigation proceedings by the HKSA are continuing.

In March last year, Deloitte also fell foul of financial inspector Richard Farrant, who was probing the collapse of the Peregrine group.

He cited an 'incomplete audit trail' by Deloitte. The firm had been asked to review interim results covering the 10 months to the end of October 1997.

Rumours had been rife about Peregrine's financial difficulties. In particular, it was known that it had a large exposure to Indonesian taxi firm Steady Safe. Mr Farrant said he was 'unimpressed by the review by Deloittes of fixed-income related exposures as at the end of October 1997'.

Heavy reliance was placed on Peregrine's management that there was 'no cause for concern'.

Eric Li Ka-cheung, legislator representing the accountancy sector, is emphatic: 'Accountants have no hesitation defending our independence.

'Accountants make mistakes, we are only human. To perform an audit under severe time constraints . . . under cost constraints. . . there's a limit as to how much you can do.

'It's like cutting the police budget in half and expecting them to catch every criminal.'

It was simply not realistic to expect every auditor to weed out every fraud.

'In most cases, to find out if one transaction is fraudulent, it takes an army of professionals. It will take them years to study every aspect of it.'

He stressed however: 'We do find a lot of them.'

The scale of the Enron scandal will do little for the profession's confidence or public image. It is also highly probable that moves to expand into other areas - such as legal services - will be put on hold because of the same conflict fears.

Some of the larger accountancy firms have aspirations of becoming one-stop shops for clients, offering both accountancy and legal services under the same roof.

Most jurisdictions, however, have been wary of multi-disciplinary practices - where accountants tie up with law firms, sharing profits. The American Bar Association was warming to the idea, but abruptly about-turned post-Enron.

In Hong Kong, solicitors are prohibited from sharing profits with an unqualified person - ie, an accountant. 'We have been sitting on the fence relatively successfully I suppose,' Law Society secretary-general Patrick Moss said.

'We've been waiting and seeing, there's not a big demand at the moment.

'The sentiment seems to be turning against it.'

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