Funding issue expected to hinder audit regulator reform in Hong Kong
Listed firms, investors and accountants likely to oppose new levies for an expanded watchdog
The government has proposed that listed companies, investors and auditors share the cost of an expanded accounting regulator, but this suggestion would likely fail because none of the three parties would be happy to foot the bill.
In a consultation paper released by the government last week, it wants to expand the role of the Financial Reporting Council by taking over from the Hong Kong Institute of Certified Public Accountants in handling routine inspection and disciplinary action for auditor misconduct.
When the council was set up in 2006, it also replaced the institute to investigate audit failures.
Hong Kong's current model of letting an industry group, the HKICPA, self-regulate accountants is seen as outdated.
The reform makes sense but the real issue is money. Who is going to pay the bill, which is likely to be much higher than the current set-up of the reporting council? The funding issue will be the most controversial in the reform plan.
At present, the council, which has very limited power, operates on an annual budget of HK$20 million, which is co-funded by the government, the HKICPA, the Securities and the Futures Commission and the stock exchange.
That is a paltry amount when compared with the budget of other overseas accounting regulatory bodies.
The Public Oversight Board in the United States has a budget of US$250 million - 97 times that of its Hong Kong counterpart. It has a much broader scope than the one in Hong Kong as it is in charge of all oversight on accountants.
The Financial Reporting Council in Britain has a budget of £14.3 million (HK$188.53 million), more than nine times that of the body in Hong Kong.
The expanded reporting council in Hong Kong will need a lot more money. This may explain why the government changed the funding model and removed itself from the list of organisations paying for this reform. As a taxpayer, I support this.
The companies forking out the cash will complain the new levies would raise their operating costs.
Investors would argue that they already pay a 0.1 per cent stamp duty on share transactions to the government, 0.005 per cent of the share transaction value to Hong Kong Exchanges and Clearing and 0.003 per cent of the transaction value to the SFC. The new levy is an unwanted additional burden for them.
In fact, the SFC has collected too much in levies from investors over the past years due to the high turnover in its business, resulting in a reserve of more than HK$7 billion. The commission, which may be the world's wealthiest regulator, should make contributions to the reporting council on behalf of investors, especially since its lofty reserves are paid by the investors themselves.