Financial regulation

Government urged to pay for Hong Kong audit watchdog reform

Legislator demands government contribute HK$300 million to the newly-empowered Financial Reporting Council, saying it is unfair when other regulators have received large sums

PUBLISHED : Sunday, 11 February, 2018, 5:53pm
UPDATED : Sunday, 11 February, 2018, 11:43pm

The Hong Kong government is being urged to pay HK$300 million (US$38 million) towards the biggest overhaul of accountancy regulation in a decade, which would see an independent watchdog given full powers to inspect, investigate and discipline auditors in more than 2,000 listed companies.

Kenneth Leung, legislator for the accountancy sector, is demanding the government cough up the money to get the newly-empowered Financial Reporting Council up and running. He said it was unfair that other regulators such as the Securities and Futures Commission, Mandatory Provident Fund Schemes Authority and the new Insurance Authority had received significant sums, while the goverment is not obliged to provide any funding to the auditing watchdog.

The Government has given seed money to all these regulators. Why is there no fair treatment to the auditor regulator?
Kenneth Leung, lawmaker

Leung asked Financial Secretary Paul Chan Mo-po last week to urge the government to help pay for the reforms.

“The Government has given seed money to all these regulators. The Insurance Authority, which was set up in June last year, was given HK$650 million for its first four years of operations. Why is there no fair treatment to the auditor regulator?” Leung told the South China Morning Post.

“If the government believes the Financial Reporting Council is important, it should also give it sufficient seed money to allow it to operate properly.”

Leung said Chan had told him the government would consider his request. However, since the legislation has not yet been passed, there would not be a funding plan for the council in this year’s budget, to be announced on February 28, Chan told him.

The government submitted a bill to the Legislative Council last month to allow the Financial Reporting Council to become a fully empowered regulator overseeing all auditors of listed companies. It will take over its additional powers from the industry body, the Hong Kong Institute of Certified Public Accountants.

Hong Kong’s accountancy regulator may have new powers, but does it have the funding to get the job done?

Its proposed budget is HK$90 million, of which half will be financed by a levy on investors, 25 per cent will come from practising accountants and 25 per cent from the HKEX and the SFC.

This aim of the auditing shake-up is to enhance the independence and power of the body overseeing accountants and bring it into line with international standards. It forms part of broader efforts to reform the financial landscape, including new listing rules which will allow giant technology firms with multiple shareholding structures to float their shares in Hong Kong for the first time.

The Financial Reporting Council’s proposed annual budget of HK$90 million (US$11.51 million) is much lower than many comparable regulators at home and abroad. Hong Kong’s Securities and Futures Commission, for example, receives HK$392 million (US$50 million), the US Public Oversight Board US$$250 million and Britain’s Financial Reporting Council at £35 million (US$48.4 million).

Under the proposal, the government has no financial commitment to the Financial Reporting Council.

Leung also wants the Legislative Council to monitor the operation of the Financial Reporting Council to make sure it functions properly.

And he urged the government to negotiate with the Chinese regulator to help the Financial Reporting Council with access to documents related to mainland accounting firms.

“The Financial Reporting Council could become a toothless tiger when it comes to handling cases of audit failure of mainland companies listed in Hong Kong. Many of these companies’ accounting documents are held in the mainland. If the council could not access these documents, it would not be able to carry out the investigation,” he said. “It needs the government to take the lead in negotiations with the mainland regulators on this matter.”

He has made that request to the Secretary for Financial Services and the Treasury, James Lau, who has replied to Leung that the government would consider it.