Lawmakers on Wednesday will decide whether to vote for a crucial measure that would hold accountants criminally liable if they failed to declare problems with the financial statements of a client company.
Under the Companies Bill, to be put to the vote in two days, auditors would face criminal liability if their accounting report did not include a declaration that the financial statements were materially not in agreement with the auditor's accounting records. They would also face criminal liability if they failed to declare that they could not obtain all the information needed for the audit. The criminal liability would be limited to a HK$150,000 fine and would not involve a jail term.
The proposed law change is part of a broader push to raise governance standards and increase investor protection. Separately, the Securities and Futures Commission (SFC) has proposed imposing criminal liability on sponsors of initial public offerings (IPOs) who fail in their due diligence.
While government officials have insisted on pushing ahead with the law change, Paul Chan Mo-po, legislator for the accounting constituency, told the South China Morning Post he had submitted two amendments to the bill.
'First, I want them to scrap the criminal liability provision. Second, even if lawmakers vote for the criminal liability clause, I'd like to amend the provision so that accountants would only face criminal liability if they were found to have approved the accounts despite knowing there were problems.'
Chan said he was lobbying other lawmakers about his amendments. 'The government proposes that accountants face criminal liability even if it's due to a 'reckless' omission. This is too harsh for professionals. Imposing criminal liability on accountants would discourage youngsters from joining the industry,' he said.
Hong Kong Institute of Certified Public Accountants (HKICPA) chief executive Winnie Cheung Chi-woon said the criminal liability provision was unfair. 'If the law is passed in its present form, as the government proposes, accountants may just declare problems for all financial statements to cover themselves so they are not liable. This could make all accounting reports too long and they may end up with unnecessary declarations.'
But a government official defended the bill. 'The government is concerned that the reform is needed to safeguard the interests of investors and upgrade the quality of the local accounting sector,' the official, who did not wish to be named, said.
Auditors have been in the spotlight in recent months after the Financial Reporting Council put 13 listed companies on watch for alleged auditing problems.
Legislator Ronny Tong Ka-wah has expressed sympathy for accountants but pan-Democrats, including Albert Ho Chun-yan, have supported the criminal liability reform.
Starry Lee Wai-king, a legislator with the Democratic Alliance for the Betterment and Progress of Hong Kong, said her party was still discussing how to vote. 'On the one hand, we have some sympathy for accounting professionals. But the commercial sector considers that the bill imposes tough standards on company directors, and these same standards should apply to accountants. We also have to be mindful of the interests of the investing public who trust in financial statements audited by accountants,' Lee said.
If passed, the bill would also scrap the unpopular 'headcount rule' governing the process of taking a company private.
The new law would replace it with a '10 per cent objection rule' that 10 per cent of votes from independent shareholders is enough to stop privatisation. At present, half of all shareholders must approve a privatisation plan, based on the number of investors, not how many shares they hold.
If the bill is passed on Wednesday, detailed subsidiary legislation will be drafted and the law will come into effect in 2014.
The proportion of votes from independent shareholders that would be needed to stop a company from being privatised