26 June 2015

Dear members,

This afternoon the HKSAR Government published the conclusions on the public consultation on Audit Regulatory Reform. The conclusions largely follow the consultation proposals but there have been some changes that to some degree reflect some of the proposals made by the Institute in response to the consultation.

In summary the key conclusions are:

Scope of public interest entities

Listed companies only but will review after sufficient operating experience

Oversight on registration, setting of CPD requirements and setting of auditing and ethics standards

Periodic reports from HKICPA
Quality review on HKICPA
Give direction to HKICPA
FRC to publish report on its oversight activities
No reserve powers for FRC to act
Reports from HKICPA will not be published (modification from consultation)

Registration of Listed Entity Auditors (LEAs)

No change to existing qualification and experience requirements
Fit and proper test required for both firm and individual partners
LEAs allowed to be registered before accepting any listed client (modification from consultation)

"Responsible persons"

Firm to nominate at least one persons from management board and/or its CEO to be registered as responsible person
Required to use "best endeavours" to ensure firm has QC policies and procedures and to ensure compliance (modification from consultation)

Inspection of LEAs

Non-compliance with inspection requirements is a criminal offence
Introduce "reasonable excuse" as a defence (modification from consultation)

Disciplinary mechanism

All powers vested in FRC subject to checks and balances
Details of disciplinary mechanisms will be developed in drawing up amendment bill (modification from consultation)
Will explore the appropriateness of involving persons independent of FRC in the disciplinary mechanisms (modification from consultation)

Maximum penalty

Higher of HK$10M or 3 times profit gained or loss avoided
FRC to publish guidelines

Independent appeal mechanism

No publicity of disciplinary decisions by FRC until the expiry of the appeal period to independent tribunal or after the appeal is determined by independent tribunal (modification from consultation)
Further appeal to Court of Appeal requires leave from Court of Appeal

Funding mechanism

1/3 each from (i) auditing profession based on existing formula, (ii) transaction levies, (iii) listed entities

Composition of FRC

Not less than 7 members appointed by HKSAR CE and CEO of FRC to be ex-officio
Majority to be non-practitioners
Can have executive directors but majority are non-executive (modification from consultation)

The Institute continues to support the development of a system of auditor regulation in Hong Kong that will be internationally recognized and Council will continue to work with the Government during drafting and passage of legislation to try and achieve further refinements to the final changes.



Best regards,

Hong Kong Institute of CPAs

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