14 August 2014

   
 

Dear members,

President¡¦s letter to members on two important issues

Thank you for entrusting the Institute's Council and management to carry out the Institute's statutory role in the public interest. I write to update you on two matters that have recently attracted considerable public comments, both of which are of great importance to our profession: listed entity auditor regulation reform and the Institute¡¦s investigation and disciplinary processes.

I. Listed entity auditor regulation reform

The government's consultation on improving the regulatory regime for listed entity auditors is set to end on 19 September. We are delighted to see that several issues raised during our member consultation have been addressed in the public consultation document. Moving forward, we will continue to engage our members and stakeholders to work on our previously raised proposals that have still to be taken up and a few new issues that have since come to light in the public consultation.

Registration
Registration of individuals who assume ultimate responsibility for a firm's system of quality control has been retained in the government's consultation proposals. We understand the need for registration of this category of individuals for effective regulation as explained in the consultation document. However, additional clarity about when action would be taken against individuals rather than the firm would be useful.

Separation of functions
The government's consultation proposals imply that the Financial Reporting Council may be charged to make all decisions on inspection, investigation and disciplinary outcomes. This will not be the optimal arrangement and may compromise the assertions about separation of inspection and disciplinary functions.

Inspection powers
There are new proposals in the government consultation that would give FRC the power to enter CPA firm premises and to introduce criminal offences should a firm not comply with requirements in relation to FRC inspections. We consider these significant changes to the current regulatory system are neither necessary nor appropriate for a routine inspection programme.

Financial penalty
The maximum penalty of HK$10 million is significantly higher than the maximum under the existing regime. Many of our members have expressed concerns that it is too high and will act as a deterrent to medium-sized firms staying in or entering the listed company audit market, which will lead to further market concentration in the hands of a few.

Similar to the proposal regarding FRC's power of entry to CPA firm premises, "penalty capping at the greater of HK$10 million or three times profit gained or loss" is a measure copied from the regulatory regimes of the securities, banking, mandatory provident fund and insurance sectors. The auditing profession is different as we are not market participants and we do not sell financial products or hold client assets. We provide services to listed companies in the same way as, say, a lawyer provides legal services. Thus, we believe that copying the sanctioning regime of financial regulatory models for other market participants is not appropriate.

Funding
The public consultation document proposes that listed company auditors should be enlisted as the third funding body of the FRC in addition to listed companies and investors. Although the Institute is currently a funding party (along with the HKSAR Government, the SFC and HKEx) of the FRC, this proposal in respect of future funding arrangements was not anticipated in pre-public consultation discussions. We had no expectation that our members would need to contribute to the funding of the FRC in its revised and expanded role.

For the benefit of all proposed funding parties, we encourage the FRC to at least provide an estimated quantum of the expected operational costs under the new system and clear explanation of accountability and control mechanisms to address concerns that funding parties will be expected to write a blank cheque. The consultation proposes that one of the key controls over FRC costs will continue to be approval of annual budgets by the Secretary for Financial Services and the Treasury. Given the resulting improvement on the regulatory regime will benefit Hong Kong capital market as a whole, we believe the government should continue to be part of the funding arrangement. If the government ceases to be a funding party and will not be represented in the council of the FRC, we are not convinced that the approval of annual budgets by the government gives sufficient comfort to potential funding parties.

We will continue to work with all concerned to help establish an independent listed entity auditor regulatory system that is globally recognized, protects public interest, and helps Hong Kong to remain as an international financial center.

The Institute's has created a dedicated webpage on the subject. Please visit it for updates and details.

II. Institute's investigation and disciplinary functions

The recent conclusion of a high profile and long running disciplinary case has generated some adverse comment on the Institute's investigation and disciplinary processes, particularly about the length of time it has taken to bring the case to a conclusion. Although we agree that excessive delays in completing cases are not acceptable and we will continue to improve the process, there are a few other factors about disciplinary proceedings that need to be understood.

Independent committees
Member investigation and discipline functions are addressed in the Professional Accountants Ordinance, and there are significant elements of independence built into them. Since 2004, there has been greater participation by government-appointed non-accountants in the investigation and disciplinary committees. These independent, non-accountant parties chair and form the majority membership of the committees. Once a committee has been formed it is the committee itself that determines how proceedings will progress. Investigation and disciplinary committees look to management for administrative support only, including providing staff to act as Clerk to a disciplinary committee in some cases, and Council, the Regulatory Accountability Board and management monitor the efficient running of cases. All proceedings and hearings are open to the public for added transparency.

In 2007 a further step was taken to enhance independence when responsibility for all investigations involving listed companies was transferred to the FRC.

Volunteers
All committee members are volunteers who are effectively donating their services out of a sense of public interest. We owe a mountain of gratitude to those sitting on the investigation and disciplinary committees for the time and expertise they provide without reward to ensure that due process is observed and appropriate decisions are reached in the public interest. Our volunteering committee members are busy and diligent professionals who need to balance their volunteer activities with other commitments, and such would sometimes inevitably lead to issues over their availability for committee work which slows down the process.

Moving forward
We believe that a number of issues that historically affected the efficiency of investigation and disciplinary proceedings have been addressed. We have built a dedicated and experienced compliance team that is focused on dealing with proceedings in a more effective manner. Rest assured that we have taken this recent experience to heart and will continue to review and enhance the investigation and disciplinary functions.

Concerns about conspiracy theories and favourable treatment for certain individuals are completely unfounded and baseless. We take our statutory duties and public interest responsibilities very seriously and our members and the public can rely on us to continue to do so.

Clement Chan
President
Hong Kong Institute of CPAs