Accounting and Auditing

Audit watchdog overhaul will still leave Hong Kong trailing, says chief regulator

Paul Winkelmann, chief executive of the Financial Reporting Council, said the proposed new laws will only put Hong Kong on a par with places like Botswana and Albania

PUBLISHED : Tuesday, 20 March, 2018, 5:03pm
UPDATED : Tuesday, 20 March, 2018, 11:15pm

Hong Kong’s biggest overhaul of accountancy regulation in a decade will still leave the city trailing the international standards of other major financial centres, according to the head of the auditing watchdog.

Paul Winkelmann, chief executive of the Financial Reporting Council (FRC), said the proposed new laws being considered will only put Hong Kong on a par with places like Botswana and Albania.

Because of the lack of an independent auditor watchdog, Hong Kong has until now not met the standards of either the International Forum of Independent Audit Regulations (IFIAR) or the European Commission (EC) regulatory equivalence – recognition that a country’s auditing regime as being equivalent the European Union’s own framework.

The changes, which would give the FRC greater independence and power, would still only qualify it for recognition by IFIAR, said Winkelmann.

“Even if the existing bill that the government proposed earlier this year is passed in the Legislative Council, we could only get membership of the IFIAR,” he said. The discussion of the bill will continue on Tuesday.

“Do we really want Hong Kong to join the list of 16 economies only meeting one but not the other?” Winkelmann said, pointing to a list of countries that includes Botswana, Gibraltar and Albania.

“Or do we want to join the 45 jurisdictions having recognition from both IFIAR and the EC, such as Luxembourg, Singapore, the United Kingdom and the United States?”

The IFIAR offers a forum for independent audit regulators worldwide to share regulatory experience and inspection findings.

Obtaining the EC equivalence would facilitate Hong Kong’s cross-border investment and trade, help enhance the city’s reputation as a financial centre, streamline cross-border regulation and reduce costs, said David Barnes, partner of Deloitte (UK), which has carried out three studies for the FRC.

The Financial Reporting Council (Amendment) Bill 2018 was submitted to lawmakers in January and will discussed in the coming months before a final vote is taken.

If successful, it will see the FRC’s powers expanded to inspect, investigate and discipline auditors in more than 2,000 listed companies. It has hitherto been limited to investigations, while other regulatory functions were the responsibility of the Hong Kong Institute of Certified Public Accountants (HKICPA).

The FRC’s chairman, John Poon, said the watchdog should comprise solely non-practitioners, to help meet the independence requirements of the EC’s regulatory equivalence. “Non-practitioner” refers to people who have had no involvement in statutory auditing or audit firms for three years.

Poon said the city has enough non-practising talent to fulfil the requirement.

Winkelmann and Poon were speaking on Monday at a press conference reviewing the work of the FRC in the 10 years since it was founded. It has received more than 400 complaints since its inception, and completed 11 investigations last year.

The most common issues are related to impairment of assets, revenue recognition, and assessing financial instruments, said Winkelmann.