Overhaul needed for accounting sector

Financial body calls for shake-up after study finds oversight of industry in city not up to world standards and may affect investor confidence

PUBLISHED : Friday, 11 October, 2013, 12:00am
UPDATED : Friday, 11 October, 2013, 3:51am

The regulation of the accounting sector is due for an overhaul, after a study found regulatory oversight in the city lagged international practice.

"Our accounting oversight structure does not match the standards of the European Union and the International Forum of Independent Audit Regulators (IFIAR)," said John Poon, the chairman of the Financial Reporting Council.

"If we maintain the status quo, it will hurt international investor confidence in Hong Kong."

The FRC has agreed with the government that reform is needed to catch up with international practices, which will mean ending the self-regulation of the sector by the industry-based Hong Kong Institute of Certified Public Accountants and instead appointing the FRC or another independent body to maintain oversight of the sector.

The government will issue a consultation paper next year before proposing a law change in 2015.

Set up in 1973, the HKICPA is a self-regulatory body that issues accounting licences, sets industry standards, provides training and regulates the city's 35,000 accountants. It also conducts routine inspections of accounting firms.

If we maintain the status quo, it will hurt investor confidence

It lost its investigative powers in 2006 when the government set up the FRC to take over the job of investigating audit failures of listed companies.

Since then, the FRC has completed 22 investigations, but it does not have the authority to take action against auditors who break regulations, nor does it have any other regulatory function.

A report commissioned by the FRC from accounting firm Deloitte in Britain released yesterday found that Hong Kong's self-regulatory system was outdated and other markets had meanwhile carried out more aggressive reforms over the past decade.

The study showed that in 40 markets including the United States, Britain and Australia, one or more non-accountant bodies had been established to regulate or supervise auditors, including oversight over registration, inspection, investigation, enforcement, education and standard setting.

The FRC is only authorised to conduct investigations and does not qualify to become a member of the IFIAR, while the HKICPA is an industry body and therefore is also not qualified to join the forum.

The HKICPA is polling its members for views on reforming the system and says while it agrees in principle with the need for reform, it has concerns over the details and is opposed to any heavy fines.

Poon said funding a new regulatory authority could be a major issue, since the FRC operated on an annual budget of HK$20 million.

This is far lower than the US Public Oversight Board, a statutory body with a budget of US$250 million and 770 staff to handle all areas of accounting regulation. In Britain, the Financial Reporting Council is responsible for inspections, investigations, enforcement and standard setting. It has an annual budget of £25 million (HK$309 million).

"The FRC runs on a modest budget as it only handles investigations of audit failures. If it is to expand its functions, the budget and headcount will need to be increased accordingly," Poon said.