End of self-regulation for Hong Kong accountants is a home-made problem

End of self-regulation and salary freezes are not surprising as city's reputation as a financial centre at risk in wake of pre-IPO audit scandals

PUBLISHED : Monday, 14 October, 2013, 12:00am
UPDATED : Monday, 14 October, 2013, 5:46am

The Big Four accounting firms are facing fresh operating challenges in Hong Kong. After persistent weakness in the city's listing market, the accounting industry faces a reform in the city's decades-old self-regulatory regime.

Three of the Big Four firms will cut or freeze the pay of thousands of their accountants in order to cope with the weakening market conditions, sources at the firms say.

Accountants from PricewaterhouseCoopers and Deloitte will freeze salaries from this month and reduce new hiring, while Ernst & Young - which has already moved to cheaper premises outside of the prime Central district - will cut pay to cope with the challenging times ahead. A partner from one of the Big Four firms told IPO Watch that Hong Kong's business climate had been battered by the mainland's slowdown over the past 12 months.

The partner explained that the Big Four in reality are merely a string of independent local partnerships, albeit with global footprints grouped under a common branding banner. That makes them extremely susceptible to local economic conditions.

And when local conditions tend to depend on IPO audit fees to make ends meet, a downturn there really hurts businesses staffed for high levels of activity.

The quartet, including KPMG, have a combined workforce of 30,000 across Hong Kong, the mainland, Macau and Taiwan.

The difficult operating conditions of the accounting firms, which are often at the bottom of the listing food chain, only serve to reinforce the poor IPO outlook in Hong Kong.

A regulatory change is only making the business seem more miserable.

The Financial Reporting Council (FRC) has urged an overhaul of the accounting industry after a report found the city's regulatory oversight lagged behind international standards. That heralds the end of self-regulation by the industry-based Hong Kong Institute of Certified Public Accountants. In its place, the FRC or some other independent body will oversee the sector.

The call for regulatory overhaul in the accounting sector comes after several newly listed firms hit financial troubles shortly after listing, raising the obvious question of why auditors had failed to detect the problems ahead of the IPOs.

The FRC said in a report published last week: "Hong Kong does not currently meet the requirements for membership of the international forum of Independent Audit regulators."

Hong Kong's reputation as a global financial centre that can compete at the very highest levels means that its accountancy firms must meet such standards.