IRD targets audit reports
THE HONG KONG SOCIETY of Accountants (HKSA) has written to its members highlighting the numerous discrepancies found in last year's audited reports by the Inland Revenue Department (IRD).
In an annual meeting between the IRD and representatives of HKSA in February, commissioner of Inland Revenue, Alice Lau Mak Yee-ming, raised the concern over the rising percentage of clean reports that were found with discrepancies uncovered by the field audit teams of the IRD.
'The IRD did raise the concern on the high percentage [about 80 per cent] of completed field audit and investigation corporation cases with discrepancies not uncovered by statutory audits,' Ms Lau said in response to written questions.
According to the IRD, last year 80 per cent of the 164 cases, which were termed as clean reports, were later found by field audits to have shown discrepancies on over 190 items amounting to over HK$90 million. Compared to 2000 there was an increase of 7 per cent last year in the number of discrepancies found in audited reports submitted to the IRD.
The common discrepancies included omitted sales, overstated purchases, understated closing stock and over-claimed expenses.
In response to the IRD's concerns, the HKSA sent out more than 1,100 letters to their member firms on July 11 to alert them of the issue.
The society is the only statutory licensing body of accountants in Hong Kong responsible for regulation of the accountancy profession.
'We reviewed the discussion and felt that the members ought to be alerted to these findings. However, the minutes were only ready and agreed by both parties recently,' said Tim Lui Tim-leung, chairman of the HKSA taxation committee.
He added that in Hong Kong, accounting professionals were compliant with international standards and the HKSA was doing its best to see full convergence into the rules and regulations.
Kaiser Kwan Kim-fung, a tax partner at Deloitte Touche Tohmatsu, said 'this kind of situation is worsening over the year and HKSA should tighten control on its members'.
Mr Kwan raised the issue of discrepancies in a seminar for accounting professionals earlier this month.
Ms Lau said the IRD's field audit and investigation unit would continue to conduct audits and in-depth investigations into suspected tax evasion cases.
'While the IRD continues to uncover discrepancies in clean audit report cases, there is not necessarily a direct nexus between the understatements detected by the IRD and the quality of audits. It should be noted that the aim, objective and scope of work performed by the IRD's field auditors are somewhat different from those of statutory auditors,' Ms Lau said.
The IRD said it would also step up efforts to promote voluntary compliance through taxpayer education and publicity programmes this year and next year to deter would-be evaders.
Mr Kwan said the discrepancies found by the IRD in the clean audited reports had raised concerns about the professional accounting standards and accounting firms should treat auditing issues more seriously and make more efforts to produce fair reports.
'The IRD will continue to tighten their grip on tax evasion and eventually we'll see less people taking advantage of the previous tax system [when there were no field audit teams],' Mr Kwan said.
A depressed economy could be one of the factors for the increased discrepancies in the audited reports, accountants said.
Shrinking fees for lawyers and accountants are also putting pressure on these professionals' profits and resources.
Paul Chow, a partner at Grant Thornton, said some accounting firms charged fees that were evidently disproportionate to the size and operations of their clients' businesses.
'I have seen many cases in the industry whereby auditing companies are under-charging the clients and that could lead to inappropriate work being carried out,' he said.
Mr Chow cited the example of a manufacturing company with mainland operations and large factory inventories that was charged auditing fees of a few thousand dollars, which under normal circumstances would be as high as HK$50,000.