Case load mounts for Financial Reporting Council

The accounting watchdog has more companies on its watch list this year, but says that does not reflect worsening accounting standards in the city.

Fifteen listed companies have been put on watch by the Financial Reporting Council, compared with 13 last year.

The council starts tracking companies when it sees media reports suggesting they may have accounting problems or when it receives complaints from other regulatory bodies or members of the public, said its new chief executive, Mark Dickens.

Dickens said that after reviewing a company's financial statements, the council determines if a full investigation is needed. Six investigations are under way at present, compared with five last year.

"This does not mean the quality of accounting or auditing in Hong Kong has got worse," he said in his first meeting with the media after retiring earlier this year as the head of the listing division of the stock exchange and taking up his position on the council last month.

Auditors came under the spotlight last year as some of their clients experienced financial problems shortly after listing, raising questions why auditors had failed to spot these in advance. There have also been instances when auditors of several newly listed companies resigned shortly after the listing.

The Securities and Futures Commission suspended sports fabric maker Hontex International from trading in March 2010 after finding the firm's prospectus overstated turnover and pre-tax profits in the three years leading up to the listing in late 2009. The firm only traded for 64 days.

Dickens said accounting problems were mostly reported at mainland firms listed in the US, triggering a general tightening of norms by international accounting firms for Chinese companies, including those listed in Hong Kong. That in turn led many auditors to step down.

"We need to understand that the poor quality of some listing companies does not mean poor quality of auditors," Dickens said.

The council is responsible for looking into audit failures of listed companies. Since its establishment, the council has completed 22 investigations.

However, it is up to the Hong Kong Institute of Certified Public Accountants (HKICPA) to decide on any disciplinary action.

Set up in 1973, the HKICPA issues accounting licences, sets industry standards and regulates the city's accountants. It also conducts routine inspections of accounting firms, a task that in many advanced markets is performed by independent bodies.

Council chairman John Poon said the government this year will consult the market for reforms to increase independent oversight on accountants, but declined to elaborate on any reforms.