More details need to be discussed and determined before Hong Kong's audit profession can have a truly independent regulator, the professional body governing its accounting sector said. The Hong Kong Institute of Certified Public Accountants' statement followed remarks by the Financial Reporting Council that government proposals for an independent audit regulator should exclude practitioners from the audit industry. Doing so, the FRC said, would meet international standards and comport with practices in major global financial centres.
"While the Institute is in support of the general direction of the reform, the Institute considers that full details of the new regulatory systems, and the related budget, need to be developed and presented to the [Legislative Council] together with the draft legislation, so that LegCo and [the] general public are clear how the new systems will serve the reform objectives and how much they are going to cost," the HKICPA said.
The Hong Kong government is seeking to introduce an amendment bill to LegCo in the 2016–2017 legislative session, which could make the FRC the independent audit regulator with more responsibilities. At present, the FRC only conducts investigations into possible auditing irregularities relating to locally listed entities. At the same time, the HKICPA performs duties such as registration, inspection, and enforcement or discipline of audit firms.
The HKICPA said it was necessary to keep investigations and inspections separate from the imposition of sanctions and to have an independent oversight body for the profession.
The HKICPA said Monday, 31 October, that while regulation of the accounting firms that audited companies listed on the Stock Exchange of Hong Kong ("SEHK") was important to the overall regulatory regime of the territory’s capital markets, it was the institute that was spearheading the process.
"Regulation of listed entity auditors is an important part of the overall regulatory system of the Hong Kong capital market," it said. "The institute was the initiator of the audit regulatory reform before handing it over to the government in 2012 to prepare for public consultation and legislation."
The HKICPA evolved from the Hong Kong Society of Accountants, which was established on 1 January 1973. The local accounting profession has since been regulated the HKICPA – pursuant to the Professional Accountants Ordinance. Conversely, the auditing of limited companies is regulated by the Companies Ordinance, the Securities and Futures Ordinance and the Listing Rules.
Hong Kong's lack of an independent audit industry regulator puts it behind other financial hubs such as New York, London, and Singapore, FRC chairman John Poon told the local media last week.
The HKICPA said details needed to be further fleshed out before the legislative process commences, firstly with regards to "checks and balances to ensure separation of inspection/investigation and sanctioning processes". It was also concerned about guidelines on the "determination of appropriate regulatory action or sanctions to ensure any action taken is relevant and proportionate to the identified audit deficiency".
Additionally, it said an independent oversight body should have sufficient audit experience and knowledge. Only such persons would be able "to make an informed judgment on the adequacy of audit work", it said. Similarly, it said the mechanism for setting, approving and monitoring an independent accounting oversight body's budget "to give comfort over the accountability and prudent financial management of the independent oversight body" was of concern.
"In particular an indicative budget should be prepared so that LegCo and funding party will have clarity about the amounts involved before committing," the HKICPA said.
The HKICPA said the new regulator should be funded by investors.