The self-regulating Hong Kong Institute of Certified Public Accountants (HKICPA) looks set to lose some of its powers as the government tables long-delayed legislation that will empower the Financial Reporting Council (FRC) to probe and discipline auditors.
“The bill will enhance the existing regulatory regime for auditors of listed entities, allowing it to be independent from the audit profession, thereby providing better protection to investors,” said James Lau, Hong Kong’s Secretary for Financial Services and the Treasury. “This is crucial to strengthening Hong Kong’s status as an international financial center and capital market.”
The Asian Corporate Governance Association had cited the absence of an independent body overseeing audits as a key reason for Hong Kong’s being rated lower than Singapore in the association’s corporate governance rankings. The FRC, established in 2006, currently investigates listed company audits, but leaves it to the HKICPA to act on its findings.
The bill, which looks almost certain to be passed, will turn the FRC into an independent oversight body that regulates auditors of listed entities considered as public interest entities (PIEs). It will be responsible for “the inspection, investigation and disciplinary functions with regard to PIE auditors,” said the financial services bureau.
For its part, the HKICPA “will continue to perform the statutory functions of registration and setting the requirements for continuing professional development, as well as setting standards on professional ethics, auditing and assurance, subject to oversight by the FRC.”
The bureau said the new regime “will also enable Hong Kong to be eligible for joining the International Forum of Independent Audit Regulators, which is an important forum for international co-operation on the regulation of auditors.”
In a statement, HKICPA President Eric Tong said the statutory body is “keen to see the completion of this exercise” because “an independent regulatory body under the new regime will strengthen Hong Kong's reputation as an international financial and capital market.”
“We are pleased to see that there will be provisions to require the FRC to establish and publish guidelines on sanction determination and application, and to separate the functions of inspection and investigation from discipline,” Tong said.
However, he expressed concerns about “governance, oversight powers, funding, sanctioning and regulation of non-Hong Kong auditors” and the proposed maximum penalty of HK$10 million, which a number of HKICPA members believe imposes an undue financial burden on smaller firms.
Tong also called for the FRC to be staffed with “sufficient persons with relevant, practical and up-to-date auditing skills and experience” and to follow “a due process that is no less robust than the HKICPA’s existing processes such as public consultation.”