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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 (2006) about 26,000 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
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."
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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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