Hong Kong’s new audit regulator should exclude industry practitioners for international recognition, says FRC
Hong Kong’s proposed independent audit regulator needs to exclude practitioners from the audit industry in order to meet international standards and be in line with major financial centres, top officials from Hong Kong’s Financial Reporting Council said on Thursday.
Hong Kong doesn’t have an independent audit-industry regulator, which puts it behind other financial centres such as New York, London, and Singapore, said John Poon, chairman of the Financial Reporting Council (FRC), at a press briefing on Thursday.
The city’s government is aiming to introduce an amendment bill to the Legislative Council in the 2016-2017 legislative session, which could make the FRC the independent audit regulator with more responsibilities.
The FRC currently only conducts investigations into possible auditing irregularities in relation to listed entities in Hong Kong. Meantime, the Hong Kong Institute of Certified Public Accountants (HKICPA), an industry organisation, has undertaken more responsibilities such as registration, inspection, and enforcement or discipline of audit firms.
“Assuming that the future Council will comprise of non-practitioners only, the [proposed] regime will enable Hong Kong to be eligible for membership of IFIAR (the International Forum of Independent Audit Regulators) and be recognised for regulatory equivalence with the EC (European Commission),” said Poon.
IFIAR is a global organisation for independent audit regulators and focuses on inspections of auditors. It currently has 51 members. EC equivalence is a recognition the EC gives to a country or jurisdiction whose audit regulatory regime complies with its requirements. It now has 50 jurisdictions worldwide, including China.
Since 2014, the EC equivalence requirements have evolved, in particular requiring the governing body of audit regulators to comprise of non-practitioners only.
“International recognition is very important,” Poon said. “We believe it is in the best interests of the investing public and Hong Kong to join the world.”
Paul F Winkelmann, chief executive of the FRC, said the reform will strengthen integrity of financial reporting by Hong Kong listed entities and enhance the city’s role as a major international financial centre.
“It brings greater confidence from investors and makes Hong Kong a better capital market,” he said.
In the government’s proposal, the future FRC will audit the auditors of about 2,000 Hong Kong listed entities, with ultimate responsibility for six functions, including direct responsibilities of investigation, inspection, discipline, and independent oversight over HKICPA in respect of registration, setting professional standards and continuing professional education requirements.
The future FRC will comprise no less than eight members, with at least two persons possessing knowledge and experience in the auditing of Hong Kong listed entities. In addition, it will be funded by levies on an equal basis by the three stakeholder groups, namely listed entity auditors, listed entities and investors.
Poon said the FRC’s 2016 budget is HK$29.4 million, with a headcount of 22.
In September, Hong Kong lost out to Singapore in the Corporate Governance Watch 2016 rankings, a survey of regional corporate governance standards, because it does not have an independent audit regulator. The survey is organised by CLSA and the Asian Corporate Governance Association (ACGA). Australia topped the list, with Singapore and Hong Kong taking the second and third spots.