China stock market

Hong Kong accounting group fights for changes by government over audit reforms

Group says HK$10 million fine too steep for small players; may force several out of business

PUBLISHED : Friday, 01 January, 2016, 2:00pm
UPDATED : Friday, 01 January, 2016, 4:18pm

The Hong Kong Institute of Certified Public Accountants (HKICPA), the industry body representing 40,000 accountants in the city, will continue to fight for changes of a government proposed audit reform as they believe the HK$10 million fine on their members is simply too harsh, its newly elected president said.

“A proposed fine for HK$10 million maybe just too high particularly for some small and medium sized accounting firms,” Ivy Cheung Wing-han, newly elected president of the HKICPA, said in an interview with the South China Morning Post.

The government is now drafting a bill to be submitted to the Legislative Council in October 2016 to seek changes by shifting more regulatory power from the HKICPA to the Financial Reporting Council (FRC).

The government-appointed FRC, which was first established in 2007, has already taken over power from the HKICPA to investigate audit failures.

The new reform measure will also allow FRC to handle practice reviews and to discipline accountants, is also aimed at matching the international trend of letting an independent non-accountancy body handle the regulation of auditors.

Currently the FRC passes on the findings of its investigations to the HKICPA for the latter to decide on disciplinary action. The audit reform will change this and let the FRC be responsible for the disciplinary action, which Cheung also opposes.

“This is like letting the FRC act as the policeman and the judge in one go. There should be an independent body to do the disciplinary action,” she said.

The funding arrangement to let the HKICPA, investors and listed companies share the cost for the FRC is also a problem.

“If the reform is aimed at adding an independent body for the audit regulator, then the FRC should not be funded by the HKICPA as there would be conflict of interests,” she said. “The reform is aimed at protecting the investors and quality of the market. It makes sense for the investors to pay a levy and the listed companies to pay for the running cost of the regulator.”

Kenneth Leung Kai-cheong, legislator for accountancy sector, supported the HKICPA and vowed to continue to lobby the government to adjust the proposal before submitting the bill.

“The HK$10 million fine is definitely too high as it may lead to some small accounting firms going out of business,” Leung said. “The government will need to give a detailed guideline on the level of fines in relation to different types of mistakes or malpractices by the accountants.”

Leung said even the Securities and Futures Commission would not conduct all disciplinary action after its investigation but would refer the case to the court or the Market Misconduct Tribunal.

“It should let a third party decide on the verdict and punishment,” he said.

In another reform plan, Cheung said the HKICPA has been working with mainland China’s Ministry of Finance to establish a mechanism for Hong Kong regulators to be able to access the audit papers related to the audit of Chinese companies.

The Ministry of Finance has a new rule from July 1 to ban accountants to take the working papers of their audits of mainland Chinese companies out of the country because the documents are classified as a “state secret”.

Cheung said by setting up a mechanism, it would allow the Hong Kong regulators to be able to access these documents.

“It involves a number of mainland bureaus so it would take time to establish such a mechanism. This would be an important project for the HKICPA this year,” she said.

Separately, Cheung said the accounting sector would not be hurt this year as the Big Four firms would continue to hire. A partner of KPMG, she said her firm will hire about 300 people this year.

“The accountancy industry would have a role to play in both good and bad economic cycles. When the market is good, we would handle a lot of initial public offerings or mergers and acquisitions. When the market is down, we may handle more liquidations or restructurings,” she said.