Hong Kong: Accounting Profession

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- HONG KONG INTRODUCTION
- HONG KONG AUDITING STANDARDS AND REGULATIONS
- HONG KONG PROFESSIONAL STANDARDS AND DISPUTES

Hong Kong Introduction

Incorporated by the Professional Accountants Ordinances (Chapter 50 of the Laws of Hong Kong) on 1 January 1973, the Hong Kong Institute of Certified Public Accountants (the Institute) is the only statutory licensing body of accountants in Hong Kong responsible for regulation of the accountancy profession.

The Institute is ruled by a Council, and grants admission to membership based on examinations. The Council may grant exemptions from the examination requirement to a person who is a current member of an accountancy body accepted by the Council and has passed the professional examinations of that body. Essentially these are Commonwealth accountancy bodies.

The Institute has about 28,000 members, almost all in Hong Kong itself. 40% of members are female. Relatively few members have Practising Certificates, a requirement to be a Partner of an accountancy firm, based on extensive practical audit experience.

Accounting firms in Hong Kong generally offer bookkeeping and accounting services to small firms and limited companies. The procedures to be adopted in respect of preparation and presentation of accounts from incomplete records are contained in a guideline published by the Institute.

The Institute has held discussions with the regulatory bodies with regard to special approval of accounting firms which audit financial institutions such as banks and securities dealers. At present, there are no additional requirements necessary to qualify a licensed practitioner to audit such clients.

In December 2009, the Institute issued a revised consultation paper proposing changes to practising certificate regime. Among the changes proposed were to: extend the ordinarily resident requirement for practising certificate holders to include residence in mainland China and also to recognize auditing experience in mainland China; require practising certificate holders to demonstrate recent audit experience for annual renewal of their practising certificate; and require practising certificate holders to register a firm to provide audit services.

After considering responses to this consultation, the Institute decided to drop the proposal to extend the location of ordinary residence for practising certificate issuance to include mainland China. The Institute also proposed in response to comments that practising certificate holders continue to be allowed to renew their practising certificate without meeting the recent auditing experience requirement and that practising certificate holders may perform audits in their own name, a firm or corporate practice provided that such practice units are registered as a Registered Audit Practice.

In addition to audit, tax and accountancy, accounting firms in Hong Kong generally offer a range of consulting services which include management consulting, financial consulting, executive recruitment, taxation advice and information technology consulting. In addition, most firms offer insolvency services, for which no additional licensing or approval is presently required.

In November, 2005, the Institute expressed support for a move to fully converge with the international financial reporting standards due to become effective on January 2005.

ACCA, with over 100,000 certified accountants in 160 countries, has long advocated a move towards harmonisation on global accounting standards.

"The move towards IFRS is happening all round the world. One of the challenges for everyone involved in the accountancy or finance profession is to understand fully what it will mean for them," noted Victor Ng, President of ACCAHK.

He added: "ACCA has led the way in the accountancy profession by using international accounting standards as the basis for its syllabus since 1996, and that makes ACCA-trained professionals more ready to meet the challenge.

The proposal to have a separate set of financial reporting standards for small and medium-sized entities has also been supported by ACCAHK.

“A common set of standards could help SMEs that trade across borders", Mr Ng explained.

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Hong Kong Auditing Standards And Regulations

In Hong Kong all limited companies are required to have an audit, unless registered as dormant. Certain private companies which are not part of a group may claim partial exemption from the disclosure requirements applying to financial statements audited in accordance with the Hong Kong Companies Ordinance, but this is of little relevance to the auditor's scope, and to the shareholders, as the majority of private companies are not required to file their financial statements with the Companies Registry. With the exception of licensed branches of foreign banks, few entities other than limited companies are required to be audited. Accountants are often employed in the preparation and filing of tax returns, and also in the preparation of financial statements, for such entities.

The auditors are required to report whether or not the financial statements show a true and fair view and comply with the Companies Ordinance and other laws applicable to certain regulated industries. The auditors' opinion must refer to the state of the company's affairs shown by the balance sheet and of its profit or loss and cash flow. In the case of a company with subsidiaries, the auditor shall report on the financial statements of the company and of the group. The auditor is also responsible for ensuring that the financial statements contain all the information required to be disclosed by the Companies Ordinance. In certain instances the auditor is required to provide the required information in his report if it has been omitted from the financial statements.

The Companies Ordinance requires the auditor to express an opinion on the truth and fairness of the financial statements but gives no guidance as to the steps he should take in reaching his opinion. Auditors are required to carry out their audits in accordance with auditing standards and statements approved by the Hong Kong Society of Accountants. These prescribe the basic principles and practices which auditors are expected to follow. About twenty standards have been issued to date.

In addition, there are a number of auditing guidelines on procedures by which the auditing standards may be applied, the application of the auditing standards to specific items appearing in the financial statements, and techniques currently being used in auditing. They also give guidance as to resolving audit problems which relate to particular commercial or legal circumstances or to specific industries.

Tax legislation has had little impact on accounting principles. In particular, amortisation of intangible assets and depreciation of fixed assets are not allowable deductions for tax purposes; under existing tax legislation, fixed assets are depreciated substantially in the first year, other than buildings and improvements thereto which qualify for little or no tax relief, while intangible assets generally qualify for no tax deduction.

The divergence between profits determined under generally accepted accounting principles and profits assessable to taxation makes it necessary for a company to submit, along with its profit tax return, a computation reconciling reported and assessable profits or adjusted losses and, in a number of instances, to provide for deferred taxation as a result of timing and other differences.

In May, 2003, the UK's Association of Chartered Certified Accountants urged the Hong Kong Accountants' Institute to strengthen its regulatory reform plans in the wake of a number of accounting scandals in the SAR and United States. Although the Institute had proposed the creation of an independent investigation panel to deal with false accounting allegations involving listed companies and financial service providers such as banks and insurers: 'It is not good enough to have an independent panel in charge of investigating accountants, it remains the duty of the Institute to handle disciplinary issues after an investigation,' the British industry body's newly appointed president, Sam Wong King-on announced.

The Hong Kong accounting body politely rejected the ACCA's suggestions, explaining that: 'Hong Kong is very different from Britain and we cannot follow exactly the British regulation model for accountants.'

However, the government brought forward plans for an 'Independent Investigation Board' (IIB) modelled on the US Public Companies Accounting Oversight Board (PSAOB). Announcing the formation of the IIB, Frederick Ma, secretary for financial services and the treasury, said: "The intention is to improve the independence and transparency of investigation procedures, therefore enhancing public confidence. We issued a consultation paper in September 2003 and have received overwhelming support for the IIB to be established. Accountants need to take corporate governance seriously. Top accounting firms should take the lead in improving their governance, enhancing their transparency and providing channels to allow scrutiny by those who are not involved in the decision-making process."

Costs of the IIB are to be shared between the government, the stock exchange (HKEx), the Securities and Futures Commission (SFC) and the Hong Kong Institute of Certified Public Accountants.

In June, 2004, however, the government came under fire for under-resourcing the IIB. The PCAOB, which was set up in the wake of a string of corporate scandals and following the high profile Sarbanes-Oxley legislation, has a budget of more than USD100m, but the IIB will have to get by on hardly more than USD1m.

The IIB will have a staff of 10 and will act on references from other regulators, but unlike its US and UK equivalents will not have powers to act on its own or to create regulatory standards. The IIB should start its work in 2005, but many doubt whether it will be successful on such a low budget. "It is obvious that HKD8 million is not going to be enough to set up a good investigation team. With such a low budget, we have to question whether the proposed board is just a hollow gesture," said Chan Kam-lam, economic affairs spokesman for the Democratic Alliance for Betterment of Hong Kong. "It will not benefit the Hong Kong market if we set up an investigation board that does not have enough money to hire experts and fulfil its duties."

The government is thought to have wanted a larger budget for the IIB, but failed to secure sufficient financial backing from the Institute, the SFC and HKEx.

In March, 2005, the Hong Kong government proposed the establishment of a Financial Reporting Council, which would regulate the audit sector.

Under the terms of the proposal, upon which which consultation was invited, the Council would have 11 primarily non-accounting members, with the Hong Kong Stock Exchange, the Securities and Futures Commission each appointing one member.

The three bodies have additionally agreed to share the cost of funding the new regulatory body, contributing HKD2.5 million each annually for the first three years following its creation.

However, the Financial Reporting Council would, in the main, be an investigatory body, with few powers to enforce penalties or pursue wrongdoers.

Speaking with regard to the need for such a body, Financial Services and Treasury Secretary, Frederick Ma observed that:

"The wake of some notable corporate failures in other parts of the world in the past few years has highlighted the importance to strengthen the regulatory regime for the accounting profession in Hong Kong."

The FRC was established in December 2006.

The FRC is funded by four parties - the Companies Registry Trading Fund, the Securities and Futures Commission, the Hong Kong Exchanges and Clearing Limited and the Hong Kong Institute of Certified Public Accountants. The four parties have signed a Memorandum of Understanding under which they have agreed to contribute: HK$2.5 million each per annum (a total of HK$10 million per annum) for the recurring expenses of the FRC in its first three years of operation; and HK$5 million each (a one-off total of HK$20 million) to establish a Reserve Fund. Contributions from the fourth year onwards will be reviewed and adjusted as necessary to reflect actual requirements.

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Hong Kong Professional Standards And Disputes

The Professional Accountants Ordinance states that one of the objects of the Hong Kong Institute of Certified Public Accountants shall be to preserve and maintain its integrity and status and to discourage dishonorable conduct and practices and, for this purpose, to hold enquiries into the conduct of professional accountants.

The Society has laid down fundamental principles upon which it has based its Ethics Statements. These principles deal with the acceptance of assignments, technical and professional standards and personal conduct.

The detailed guidelines deal with independence, confidentiality, unlawful acts or defaults by clients or members, advertising and publicity, obtaining professional work, changes in a professional appointment, fees, management consulting services, ethics and tax practice, clients' monies, restrictions on providing company secretaries and corporate directors to audit clients and financial and accounting responsibilities of directors.

It should be noted that the Hong Kong Institute of Certified Public Accountants restricts advertising and publicity and its members may complain to the Society whenever they consider any firm has acted in breach of the guidelines.

The Hong Kong Institute of Certified Public Accountants investigates complaints against practising members in respect of alleged failure to observe auditing standards. Such investigations are generally carried out by the Disciplinary Committee of the Institute and may result in the suspension of the guilty party's practising certificate.

The Hong Kong Institute of Certified Public Accountants operates a scheme of Practice Review. A review will be carried out on all firms in practice once every four years or so.

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