Dear Member and Student,

Subject: CE Update May 2012 (Part 2) – Practice Concerns

This is a continuation of my May 2012 update to you following Part 1 (meeting with CE-elect) dated 14 May 2012.

Practice Concerns

1. Criminal sanctions on auditors proposed - Companies Amendment Bill

Clause 399 of the Companies Amendment Bill, currently going through final hearings at LegCo, makes it a criminal offence, punishable by a fine, for an auditor if the auditor knowingly or recklessly omitted a required statement in the audit report, where (i) the financial statements are not in agreement with the accounting records in any material respect; or (ii) all the necessary and material information and explanations for the audit have not been obtained.

This will be the first time the audit profession is put under a criminal penalty regime for an omission in its professional work without need to prove any dishonest intent.

We have written to the Bills Committee expressing grave concerns about the impact of the clause on the profession and were invited to attend a bills committee hearing on 16 May. I together with vice president Clement Chan represented the Institute, and made the following points: -
1. The test of recklessness does not include a test of dishonesty. Auditors could find themselves in a state of increased uncertainty, as they may face not just unlimited liability under a civil suit and potential bankruptcy but also, with the new provisions in place, the temptation may be to look for recklessness in their conduct and additional criminal charge.
2. Professional neglect, which is a target of clause 399, while serious and punishable, is already subject to unlimited civil liability. It is also a disciplinary offence that could result in a permanent removal of practice licence. The case for introducing additional criminal sanctions has not been made.
3. While the criminal offence is punishable by a fine and no imprisonment is imposed, a criminal record carries reputational damage for a professional and may mean the end of a career.
4. As regards persons liable to be prosecuted under clause 399, the bill currently covers, amongst others, employees and agents of the auditor who is eligible for appointment as auditor of the company. The concept of eligibility for appointment as auditor is ambiguous and adds another element of uncertainty. While the Government is likely to propose committee stage amendments to this, we are doubtful they will eliminate all uncertainty.
5. The Administration has argued that similar legislation exists in the U.K. Companies Act from which clause 399 drew reference. However, the UK provision was brought into the Companies Act 2006 by the U.K. government as an adjunct to other provisions which in principle allow auditors to limit their liability. The Institute considers that clause 399 should not be introduced on its own into the Companies Ordinance, when no similar liability relief or protection, is to be given to auditors in the Companies Bill or elsewhere.

A number of legislators also spoke against the imposition of criminal sanctions against professional negligence (albeit of a more serious kind) without dishonest intent. We have asked that the clause be removed from the bill, and we are actively seeking to ensure at least that the test of dishonest intent is clearly spelt out in the clause by requesting that the words "dishonestly or with intent to defraud" be added, in place of "knowingly or recklessly", as these words make the line for committing an offence too uncertain for comfort.

I attach a copy of my latest submission to the Bills Committee dated 24 May 2012, and extract of clause 399 for your reference. You may write to the Institute or the Bills Committee directly if you wish to express your comments on this clause.
2. SQ/SD Taxation: threat or opportunity for SMPs?

After the Institute successfully introduced the specialist qualification and designation (SQ/SD) for insolvency, the council endorsed the next step in September 2010 to introduce an SQ and SD for taxation. This was in accordance with the fifth long range plan (2007 – 2011).

Addressing SMP concerns

The tax specialist programme was two years in the making under the guidance of the Tax SQ/SD Development Committee (TDC) headed by Tim Lui, former chair of the Institute's taxation committee, and involved many tax experts including IRD representatives and tax practitioners from the Big 4, SMP & PAIB and also other non-accountant tax professionals.

After the first leaflet inviting application for the SQ (Taxation) programme was issued on 21 February 2012, our attention was brought to concerns of small and medium practitioners (SMPs) on two issues: (1) while there was support for the educational aim of the programme, the name SQ (Taxation) as a title that can be awarded gives the impression of a designation and may create a competitive disadvantage to SMPs who have not done it; (2) this first leaflet indicated that the programme will be open to non-members and may create competition to CPAs.

The president and I listened to these objections and reported back to the council in March. We also conducted numerous dialogues with the SMP Leadership Panel and the TDC to understand and address these concerns. Collectively, we reached the decision to re-name the tax programme to "advanced diploma in specialist taxation" (ADST) for which a certificate of successful completion would be given by the Institute instead of the title SQ (Taxation). We would also remove any reference to SQ/SD in our launch leaflet of the programme to allow these to be further explored with greater consultation with the practitioners. We also agreed that the programme would be offered to members only and only when there are vacant seats would we consider admitting non-members who have reached the entry level for the programme (ie QP module D pass or equivalent knowledge). The revised leaflet carrying these revised terms and rid of all mention of SQ and SD was issued on 28 March.

The advanced diploma for specialist taxation programme began on 21 April as scheduled and of 72 places available, 69 people signed on. A majority of the 65 Institute members taking the course are SMPs looking to deepen their knowledge of taxation. We believe a deeper knowledge of taxation would help make our members more competitive in today's market, where our competitive edge depends on the depth of our expertise.

The Institute has paid attention to the concerns expressed by SMPs about the potential competition and threat that an SQ/SD for taxation may pose to their business. That is why we have postponed the timeframe for introducing the SQ/SD for taxation. The TDC has been tasked by the Council to develop the criteria for the SQ/SD for taxation that will include a "grandfathering" clause for SD so that all tax practitioners with the proper experience and competencies can be granted the specialist designation. The TDC will continue this work and will, as part of the process, conduct wide consultation with all stakeholders, including SMPs with regard to the question of "threat or opportunity". We look forward to hearing your views.

Reckless article in HKEJ

Before I end this subject, I must express our deep regrets about an unjust and abusive article littered with factual errors that was published in the Young Accountants Association (YAA) column of Hong Kong Economic Journal on 27 April 2012 about the advanced diploma in specialist taxation and the Institute's management.

Click here to see my letter (in Chinese) to the editor responding to this article.

I would like to clarify several points:
The Institute's new advance diploma in specialist taxation is a high quality integrated programme of study of different aspects of Hong Kong, China and international tax pitched at a very high standard expected of specialist professional training. It will enable participants to extend their practical taxation skills necessary for the increasingly global landscape. A second new training programme is planned, which will extend the knowledge and depth of China tax with the aim of meeting the knowledge level of three of the five papers of the mainland's certified tax agent qualification (中國註冊稅務師).
The Institute's management and the TDC had created and introduced the course under full due process endorsed by the council. There have been regular reports made to the Council over the last two years during the development of the SQ/SD for taxation and Council’s approval is sought and obtained on every vital policy proposal in this regard, including the framework, level and scope of the programme, the consultant appointed to write the programme, formation of the TDC to review and advise on detailed development of the programme and oversight exercised by the Professional Qualification Accountability Board (PQAB).

To enable our members to be clearer about the Institute's post qualified specialization programme, I attach the full specialization framework endorsed by the council in 2007 for your reference. This has remained unchanged except a variation endorsed by council in June 2010 that the proposed titles of Dip [topic] and CPA [topic] were changed to SQ [topic] and SD [topic] respectively.
3. Bogus CPA

In 2011, the Institute received 57 cases of complaint involving businesses which are not CPA practices but use CPA in their name or advertise that they offer audit services, which violates section 42 of the Professional Accountants Ordinance ("PAO"). The number is a big jump from previous years.

Major combating efforts are taking effect

I am pleased to update you on the Institute's success in combating these offences. 52 out of the 57 cases we identified led to corrective actions being undertaken by the offenders. These include:

(1) a change of business/company name of 21 entities;
(2) removal of website materials of 18 entities; and
(3) 13 entities assured that they have amended or ceased to distribute their promotional materials.

In 2012, only 7 such cases of complaint have been received up to now.

Our ability to resolve most of the 2011 cases and the decrease in complaint cases in 2012 are the result of the following measures undertaken:

(1) Collaboration with the Company Registry and Inland Revenue Department to prevent the registration of new companies and businesses which are not CPA practices using CPA in their name and giving the public an impression that they are CPA practices.
(2) Increased efforts by the Institute's compliance department (with dedicated resources) to follow up on potential violations of section 42 of the PAO.
(3) Collaboration with the Police and Commercial Crimes Bureau (CCB) to improve investigation and prosecution measures (including centralized handling of cases at CCB) against "bogus CPAs".
(4) Interview with the press to raise public awareness of the issue and risks associated with engaging "bogus CPAs". Attached is a recent full page news report in the Hong Kong Economic Journal dated 21 May 2012 for your reference. This has alerted the Trade Development Council and a meeting will be held to discuss collaboration on this issue.
(5) We've also taken initiative to close a loophole in the Professional Accountants Ordinance (PAO).

Making it illegal for non-CPA practices to set up CPA companies and allowing a single director CPA corporate practice under Professional Accountants Amendment Bill 2012

This private members bill, sponsored by Paul Chan on behalf of the profession, would make changes to the PAO to accomplish two things:

(1) To prohibit any company, not being a corporate practice registered with the Institute, to use "certified public accountant," "CPA" "會計師" or similar description, initials or characters in its name (section 42(1)(ha)).
(2) To permit a sole practitioner to register a corporate practice under the PAO with only one director and shareholder (section 28D). This will take away the need for a sole practitioner to find a nominee director / shareholder before it can use the limited companies mode to practise.

Members were notified of these proposed amendments in my emails of 20 & 30 May 2011.

The bill was gazetted on 4 May and is in the queue for the first reading at LegCo this month. We will keep you posted.

Next Update

In Part 3, the last part of my May update, I'll cover China and international subject matters.

Please contact me at should you have any questions on matters included in this update. I value the opinion of members and look forward to hearing from you.



Sincere regards,

Winnie C.W. Cheung
Chief Executive
Hong Kong Institute of CPAs

CPA: The Success Ingredient