Funding model proves thorny issue for auditing reform in Hong Kong
Disagreement mounts over allocation of powers and funding sources as reform draws closer
The government has completed its consultation on a long-awaited reform to regulate auditors of listed companies with the aim of lifting standards and sparing the city any more of the accounting scandals seen in recent years.
It appears many stakeholders have indicated their support for the reform in principle, but a key sticking point remains: who will foot the bill for a more powerful regulator? This thorny question looks set to be at the heart of the debate over the reform in the coming months.
The government has proposed changing the law to expand the reach of the government-appointed Financial Reporting Council to take over more powers from the Hong Kong Institute of Certified Public Accountants (HKICPA), adding to its brief routine inspections and disciplinary action for auditor misconduct.
The council was set up by the government in 2006 to assume the powers of the HKICPA in investigating alleged audit failures. But for many, the move did not go far enough. In many overseas markets, responsibilities covering inspection, investigation and disciplinary action against auditors have been handed to independent bodies.
The government wants investors, listed companies and auditors to pay for regulation
The fact that Hong Kong let the HKICPA self-regulate the industry created an impression that the city is in a regulatory Stone Age. This failure to keep up with global practice has shut the city out of the international accounting regulatory body.
It came as no surprise that the council has echoed the government's line on reform. Nor was it a surprise to hear the HKICPA voice some opposition to a move that would reduce its clout. In particular, the HKICPA says the maximum fine of HK$10 million for accounting breaches is too high. It is also worried about the council becoming too powerful.
The accounting body's arguments may not hold up, given that the Securities and Futures Commission and the proposed Insurance Authority to be set up next year have maximum fines set at HK$10 million.
However, funding is shaping up as the trickiest issue. The council, now with an annual budget of HK$20 million, is financed equally by the government, the stock exchange, the SFC and the HKICPA. The government wants to change this funding model, leaving it up to investors, listed firms and auditors to pay for it.
But the council said its funding should exclude accountants to ensure its independence. The HKICPA does not want auditors or listed companies to stump up funds, saying investors should be the only contributors.
Poor old investors. No one is stepping in on their behalf. They have to pay many fees already; a new levy would not be popular.
Significantly, any move to fund the council by a levy on transactions in the stock or futures markets will put it on a path to the riches now enjoyed by the SFC. The commission has a reserve of HK$7 billion, equal to five years of its operations, thanks to inflows from a market bull run from 2006 to 2007.
But if the council ends up with the same funding model, it will face volatile income flows that are tied to market turnover. A fixed fee paid by listed firms or a fixed contribution by the stock exchange and the SFC may be a better option.
