The Hong Kong Institute of Certified Public Accountants has submitted its proposals to the government on the Companies Ordinance rewrite consultation, a revision of company laws affecting almost 800,000 companies in the city.
While supporting the proposals for stronger corporate governance and regulation, the Institute is drawing attention to two areas in particular that concern its role as Hong Kong’s statutory body and standard setter of the accountancy profession: financial reporting for small-and medium-size entities and auditors' rights to information.
"Our proposals aim to reduce the grey zones in the government's consultation within these two areas," says Wilson Fung, president of the Institute. "By making these areas clearer, the law will be easier to use and will make Hong Kong a better place to do business."
Reporting for SMEs
In 2005, the institute issued financial reporting standards for small-and medium-size entities in Hong Kong. The standards were specially developed for Hong Kong companies that prepare financial statements in accordance with section 141D of the Companies Ordinance.
These standards helped shelter very small companies from high compliance costs and cumbersome time constraints posed by the full Hong Kong Financial Reporting Standards, which were issued for listed companies and public interest entities. The criteria for small-and medium-size entities are two of the three following conditions: total revenue of less than HK$50 million, total assets of less than HK$50 million, or less than 50 employees. Then in April this year, the Institute issued HKFRS for Private Entities, which are based on international standards and which can apply to all non-listed firms outside this size limit.
The government has suggested expanding the use of these standards to groups of small private companies and to private companies that do not qualify as small companies on the size criteria, where shareholders holding at least 75% of the voting rights resolve to do so and no other shareholders object.
"The Institute wants to keep the limited size criteria in the Companies Ordinance because except for very small companies, we'd like to see other private companies doing their financial reporting in the HKFRS for Private Entities standard," says Fung. "This is the standard used internationally and this is the standard that will allow investors to compare Hong Kong companies with their peers around the world."
The original small company reporting standards were designed with small, single private companies in mind, which are likely to have simple accounts for which historical information is adequate. Larger companies or groups of companies using this standard may not disclose enough information to show the financial performance and position of these companies.
The HKFRS for Private Entities, effective 30 April, was issued as an alternative this year. This set of standards is a reporting option closely aligned with the international standards for non-publicly accountable companies issued by the International Accounting Standards Board.
Fung says the full HKFRS is for listed companies and can be burdensome for private companies, while the existing small financial reporting standards are best suited for very small, private companies.
In its submission, the institute supports the government's proposal to give auditors more access to information based on what is necessary to perform an auditor's duty. While the government is proposing that auditors be able to interview employees and ex-employees at any level, the Institute's submission expresses reservation about whether this is necessary.
HKICPA argues that these interviewees may not be able to give the necessary information and subjecting the company or its responsible persons to criminal sanctions has the potential of being unfair. Unfettered auditor access to current and former employees may affect hiring, necessitate a change in recruitment policies and employment contracts, and drive up the cost of business, according to Fung, and Hong Kong needs an environment where companies can freely bring in whoever is necessary to build their businesses.