Hong Kong accountants agree to give up some regulatory powers but won’t foot the bill

PUBLISHED : Monday, 02 January, 2017, 12:07pm
UPDATED : Monday, 02 January, 2017, 10:53pm

The accounting industry body in Hong Kong supports proposed government reforms to transfer more of its regulatory power over auditors to an independent regulator but rejects the idea of paying for it, according to its newly elected president.

Hong Kong Institute of Certified Public Accountants (HKICPA) president Mabel Chan Mei-bo said the institute will negotiate with the government in the next few months over the key question of who will pay for the operation of the Financial Reporting Council (FRC) after the reform is implemented.

“The HKICPA supports the government’s proposed reform to enhance independence of the regulation of auditors of listed companies in a bid to match international practices. However, we disagree with the proposal that requires the HKICPA to be one of the parties to pay for the operation of FRC,” Chan told the South China Morning Post in an interview.

“The whole purpose of this reform is to add independence to auditor regulation. If the HKICPA needs to pay for it, then it is not independent enough,” she said.

The government plans to submit a bill to the Legislative Council in mid 2017 to change the law to shift more regulatory power from the HKICPA to the FRC, with the purpose of making FRC a fully independent audit-industry regulator.

The government-appointed members of the FRC, which was established in 2007, have already taken over the investigation of audit failures from the HKICPA but the industry body still retains the duties of routine inspection and decides on the penalty if auditors are found to have breached the rules.

The whole purpose of this reform is to add independence to auditor regulation. If the HKICPA needs to pay for it, then it is not independent enough
Mabel Chan Mei-bo, president HKICPA

This situation has seen Hong Kong lag behind other financial centres such as New York, London, and Singapore, which have independent audit regulators. In September, Hong Kong lost out to Singapore in the Corporate Governance Watch 2016 rankings, a survey of regional corporate governance standards, because it did not have an independent audit regulator.

If approved by Hong Kong lawmakers, the proposed reform law would give FRC the power to regulate auditors of about 2,000 Hong Kong listed companies. The auditors for non-listed companies would remain under the supervision of the HKICPA.

The FRC’s 2016 budget was HK$29.4 million, with a headcount of 22. It is currently funded by several parties including the government, the HKICPA, the Securities and Futures Commission and Hong Kong Exchanges and Clearing. After the reform is implemented into law, the government wants the HKICPA to remain as one of the four parties footing the bill.

However, the association disagrees. “If the FRC is to become a fully independent regulator, the accountants should not be the ones to pay. Since the reform plan is intended to protect the interest of the investors, it should be paid for by investors via a levy on stock transactions,” Chan said.

Christopher Cheung Wah-fung, lawmaker for the financial services sector, opposed any new levy for investors.

“It should be the SFC [to pay], not a new levy paid by investors to finance the FRC. Investors already pay a levy to finance the operation of the SFC. The investors should [NOT?] be asked to pay more for another regulator. The SFC should pay the bill for the FRC as it is also related to the regulation of the stock market and listed companies,” Cheung said.

Chan said the HKICPA would also fight to have an independent panel established to decide on the penalty given to auditors who fail in their duties, instead of letting the FRC come up with the punishment.

“The FRC is already doing the job as investigator. If it is to handle sanctioning as well, it would become too powerful and lack balance,” she said.

Chan said the HKICPA would also want the government to set guidelines on sanctioning auditors as the current proposal for a maximum fine of HK$10 million is too high. “Guidelines would help to make it clear when the heavy fine would be imposed,” she said.