Position Paper On
Proposals To Strengthen
The Regulatory Framework Of
The Accountancy Profession And
Amendments To The Professional
Accountants Ordinance And By-Laws
Position Paper on Proposals to Strengthen
the Regulatory Framework of the Accountancy Profession
And Amendments to the
Professional Accountants Ordinance and By-laws
Purpose
1.
The purpose of this position paper is to explain to members the proposals Council made to
the Government to increase the oversight and transparency of the Society in the regulation of
the accountancy profession, and the considerations that have been taken into account by
Council in their development. The paper also sets out the various other proposed amendments
to the Professional Accountants Ordinance and By-laws to provide for changing the name of
the Society and membership designation and to make the operation of the Society more
effective.
Introduction
2.
Over the years, the Society has made continuous refinements to monitor the quality of work
of our members and to take remedial and disciplinary action where necessary. However, the
collapse of Enron and WorldCom in the US has attracted worldwide public concern over a
number of corporate governance issues and in particular the credibility of financial reporting
and auditing practices. As a result, many countries have introduced reforms, or are reviewing
the regulatory framework governing the accountancy profession. The Council of the Society
has been monitoring these developments closely and has been considering whether similar
changes should be introduced to our own regulatory system to enhance public confidence in
the accountancy profession.
3.
Soon after the World Congress of Accountants in November 2002, the Financial Services and
Treasury Bureau (“FSTB”) called upon the profession to review its overall regulatory regime
with the view to making it more transparent and independent. Council acknowledged the
need to address Government’s concerns quickly and in response, held a special meeting in
mid December to formulate guiding principles of its proposals to the Government.
4.
Council accepts that more transparency and lay participation in the Society’s regulatory
processes would provide the public with the added comfort and assurance that their interests
are, and will continue to be, served properly. In late December 2002, Council announced the
gist of its main reform proposals, and made a written submission to the FSTB with details
and justifications in January 2003.
Proposals for Regulatory Reforms
The Proposals
5.
There are four components in the Society’s package of proposals. These are:I.
Expand lay members in Council
Increase lay members in Council, the Society’s governing body. Lay participation,
including government appointed officials on Council, will be increased from the present
2 to 6. This will increase the percentage of the lay members and Government appointed
officials on Council from the current 13% to 26%. The additional 4 lay members will
be appointed by the Government.
II.
Expand the size and lay members in Investigation Committees
Expand the membership of any Investigation Committee instigated by Council from 3
to 5 to deal with an investigation concerning alleged accounting, auditing and/or ethics
irregularities, and alter the composition of the Committee, with the majority of members
(including the chairman) being lay persons. The chairman and members of the IC will
be determined by an independent Government appointee.
III. Lay majority for Disciplinary Committees
Alter the composition of the 5-member Disciplinary Committee instigated by Council,
with the majority of members (including the chairman) being lay persons. The chairman
and members of the DC will be determined by an independent Government appointee.
IV. Establishment of an Independent Investigation Board
As a variation of the proposal of expanding lay participation and majority in Investigation
Committees, Council suggested that the Government should, as a longer term solution,
consider establishing an Independent Investigation Board (“IIB”) to further enhance
the objectivity, independence, and power of investigation into any alleged accounting,
auditing and/or ethics irregularities related to “listed entities”, namely, companies listed
on the Stock Exchange of Hong Kong Limited. Under this scenario, alleged accounting,
auditing and/or ethics irregularities related to “non-listed entities” will continue to be
investigated by Investigation Committees instigated by Council.
The IIB, if established, should be subject to the following three principles:
i. majority lay membership;
ii. independent funding; and
iii. reasonable suspicion of a disciplinable offence under the PAO,
and would be accountable to the FSTB whose role should be to oversee the effective
operation of the IIB, including the appointment of suitably qualified persons for the
Board of the IIB and its Investigation Panels, a regular review of the IIB’s reports and
operations, and assistance in funding.
6.
The first three components are key steps to enhancing oversight of the Society’s governance
and regulatory functions and thus the oversight over the accounting profession, including
the major area of concern, the regulation of auditors.
7.
Increasing participation of lay persons with the appropriate experience and community
standing in Council will enhance both the transparency and objectivity of the Council’s
decisions. Introducing lay majority, including the chairman, on Investigation Committees
and Disciplinary Committees, will address the issue of independence which is a major concern
to the public. The addition of lay participation to these three bodies will provide the necessary
safeguards and ensure that public interest is balanced against the interests of the Society’s
members.
8.
Council believes that its proposals submitted to the Government are both practical and cost
effective solutions for Hong Kong. They will go a long way towards addressing the call for
more transparency, independence and oversight of the accountancy profession. By taking
the initiative to quickly address the concerns of the investing public, the Government and
other regulators, Council believes that it has enhanced the reputation and standing of its
members in the business community.
Phased Approach in Implementing Reforms
9.
Council proposes that its proposals can be implemented in two phases. Phase 1 is to implement
the proposals concerning changes to the composition of Council and matters related to the
investigation and disciplinary committees as soon as practicable. These are relatively
straightforward but will require amendments to the Professional Accountants Ordinance
(“PAO”).
10. As explained in paragraphs 35 - 44, Council also has other proposals to amend the Ordinance
and By-laws, including the much awaited re-branding proposals approved at the Society’s
EGM on 11 November 2002. Open hearing and other proposals issued in a White Paper in
2000 relating to disciplinary proceedings and other regulatory matters, as well as other adhoc
amendments aimed at improving the efficiency and effectiveness of the Society’s operational
and regulatory processes. It is in our interest, that these are taken forward as soon as possible.
Council therefore proposes to seek all the necessary amendments through a Private Members
Bill (PMB) to be sponsored by Dr. the Hon Eric Li Ka-cheung in his own name, which is a
much faster route than the Public Bill route. These other amendments are proposed to be
introduced in the PMB at the same time under Phase 1 of the self regulatory reform proposals
outlined above.
11. Since the proposed Independent Investigation Board (the fourth component in the Society’s
package) is proposed to be established with separate funding outside the HKSA, the legislative
changes to effect such a proposal will be the subject of a separate consultation and legislation
by the Government, and is therefore not included in the present legislative amendment exercise.
This will be under Phase 2. Council understands that the Government plans to issue a
consultation paper on the IIB proposal in the coming months, and subject to the views of the
public, appropriate legislative amendments would be made. It is envisaged that the amendment
to give effect to the IIB in its proposed form would complement Council’s present openingup proposals. In any event, Council expects that it would take some time before any legislative
proposals on the IIB could be finalized, and so in the interest of promoting transparency and
accountability at the earliest opportunity, Council considers it necessary to proceed with the
opening-up proposals in the first instance.
12. Council has emphasized that the four components in its proposals put forward to the
Government should be considered as a composite package. It therefore reserves its position
in regard to the need to review its Phase I governance and regulatory reform proposals, as set
out in the PMB, pending the outcome of the Government’s consultation on the IIB.
Government’s Response to the Proposals
13. In his speech made at the Society’s Spring Cocktail Reception held on 27 February 2003, the
Secretary of the Financial Services and the Treasury expressed the view that our proposals
are a move in the right direction. The Government hopes that Phase I can be introduced as
quickly as possible. It has also indicated that it will take the lead in the consultation process
on the establishment of the IIB, with contributions from the Society. This view was reiterated
during the presentation to the Legislative Council Panel on Financial Affairs at its meeting
on 7 April 2003.
Considerations in Formulating the Reform Proposals
14. In making its proposals, Council has strongly recommended that the Government should
conduct a comprehensive review of the capital markets regulatory framework to ensure that
other key players are similarly reminded of, and are clear about, their respective roles and
responsibilities and are adequately regulated. The credibility of our markets is a sum of the
contributions from all major players. Over-regulation of one sector, such as the accountancy
profession, will not necessarily result in greater confidence in, and stability of, the entire
market.
15. In developing its proposals, Council has taken into account:
•
international guidance on principles for auditor oversight;
•
the corporate culture and environment in Hong Kong;
•
the effectiveness of reforms;
•
the cost effectiveness of reform;
•
the need for the Society to retain disciplinary powers.
a) Principles for auditor oversight
16. In developing the package of proposals, Council was aware of, and took into consideration
the principles for auditor oversight that had been made public. These were a sound basis for
developing reforms for the Society’s own regulatory regime.
17. In October 2002, the Technical Committee of the International Organization of Securities
Commissions (“IOSCO”) published a list of general principles for the oversight of auditors
who audit financial statements of companies whose securities are publicly traded in the
capital markets. The key principles stipulated by IOSCO are:• Auditors are licensed by establishing proper qualification requirements
• There are effective standards to ensure auditors are independent
• A mechanism exists, acting in the public interest, to oversee the quality and implementation
of professional standards
• Auditors are subject to discipline by an oversight mechanism that is independent of the
audit profession and adequately funded and operates in the public interest
• The oversight body has the authority to carry out disciplinary action
• The oversight body has a process of performing regular quality reviews to monitor the
audit procedures and practices of audit firms.
18. The European Commission had also published a set of principles for public oversight of the
European Union (“EU”) audit profession for application by its member states. The key
principles are not dissimilar to those of the IOSCO. In brief, they require the public oversight
mechanisms to:-
•
Be applied to all auditors
•
Involve significant participation of non-auditors
•
Comprise education, licensing and registration of auditors, standard-setting, quality
assurance and disciplinary systems
•
Include investigation and disciplinary powers
•
Be transparent
•
Be independently and adequately funded
19. Both IOSCO and EU recognize that one size does not fit all and there are different forms and
structures in which auditor oversight can be achieved. The principles recognize that it is not
always necessary to establish a separate oversight body. The oversight mechanisms could be
functioning effectively in the existing regulatory framework and also in a professional body
such as the Society. Council notes that the regulatory functions required of the oversight
body as outlined in the IOSCO and EU principles are in fact incorporated in the current
functions of the Society, which include the following:
(a) Governance through a Council with broader public interest representation
(b) Membership admission
(c) Licensing of auditors
(d) Standard-setting
(e) Quality control (monitoring financial statements of listed companies and on-site practice
reviews of audit working papers)
(f)
Investigations and complaints handling
(g) Disciplinary proceedings
20. Council therefore believes that the Society’s current regime, reinforced by its new package of
proposals, will address all the IOSCO and EU principles in both substance and in form. It
has also undertaken to consider whether some form of oversight on its existing practice
review process should be introduced to make its regulatory regime even more open and
transparent.
21. Council however recognizes that there is a need for substantial funding for investigations
into allegations of professional misconduct, especially those involving listed companies. The
proposal to establish the IIB will thus be a longer term solution to address the limited resources
of the Society and to give greater independence to the investigation work involved.
b) Corporate culture and environment
22. Both IOSCO and the EU recognize that in view of the wide range of different legal, business
and professional environments and regulatory structures that exist in different jurisdictions,
oversight of auditors could occur in several ways, including by self-regulating professional
organizations, such as the Society.
23. Council has advised the Government to take a pragmatic and considered approach in
identifying a suitable regulatory framework for listed companies in Hong Kong. The market
size, corporate culture, investors’ mindset and operating environment of listed companies in
overseas markets are significantly different from that in Hong Kong; so are the laws and the
regulatory framework. To illustrate this point, we have pointed out that in the US, the
granting of share options to company executives as remuneration, which may have fuelled
the desire to show continued improved growth and profits, is the norm. This has led to a
number of accounting irregularities and malpractices. However, the use of share options is
not a wide-spread practice nor is the extent the same in Hong Kong, probably because many
Hong Kong listed companies are family-owned and controlled. Its directors are also major
shareholders and the interests of management are therefore more aligned to the interests of
shareholders.
24. Council has also highlighted the fact that because the US has a culture of litigation, it relies
heavily on the courts to settle disputes and therefore the standard setters in the US have
adopted “rule-based” accounting standards to “minimize” differing interpretations. In
contrast, Hong Kong accounting standards follow the International Accounting Standards
that are more “principle-based”. “Principle-based” accountancy standards require the
application of the spirit and substance of the standards rather than their precise written or
legal form.
25. Council has therefore stressed to the Government that there is a danger in importing an
elaborate regulatory regime into Hong Kong, in the name of “international best practices”
when in fact there are none at this time. Adoption of reforms introduced overseas, without
a considered assessment of their appropriateness for Hong Kong, may prove to be an overkill
that will stifle, rather than improve, the Hong Kong market.
c) Effectiveness of reforms
26. Council has also pointed out to the Government that as far as we are aware, the regulatory
reforms introduced or contemplated in other major overseas jurisdictions over the last twelve
months or so are still untested for their effectiveness. For example, the Public Company
Accounting Oversight Board (“PCAOB”) established in the US under the Sarbanes-Oxley
Act, with a proposed annual budget of US$98 million, has yet to become fully operational. It
has made a number of proposals to increase control over the audit profession. While many
of these may lead to increased auditor independence, they are also creating many
unprecedented and unintentional jurisdictional and operational difficulties, which may in
the long run stifle the development of markets and in fact blur responsibilities and
accountability. It will probably take at least a year or more before any assessment can be
made to determine whether the new regulatory structure in the US is effective.
27. Council has emphasized to the Government that in the absence of any evidence to show that
oversight mechanisms elsewhere will actually be effective, it is premature for Hong Kong to
immediately copy overseas oversight models. Hong Kong has achieved its success because of
its ingenuity and minimal governmental intervention. Reforms copied wholesale from other
jurisdictions could eventually prove to be misfits that will stifle rather than help Hong Kong’s
growth and development.
d) Cost effectiveness
28. Council has advised the Government that it will not be in the interests of the public and the
Government to establish a further separate oversight body for the accountancy profession.
Establishing another oversight body would only duplicate the Society’s existing role, require
substantial funding and infrastructure support and go well beyond what is necessary for
Hong Kong. As an illustration of the disparity in the size and complexity of the accountancy
professions regulated in different jurisdictions, we have pointed out that the regulatory
framework in the US regulates some 300,000 professional accountants spread over 50 states
and the regulatory framework in the UK regulates over 300,000 professional accountants
from 6 different accounting institutes. In contrast, the Society regulates 20,000 professional
accountants in one city.
29. In some overseas jurisdictions such as the UK, a separate independent oversight body may be
justifiable to harmonize disparate rules which might apply to different accounting bodies.
Hong Kong, in contrast, has an established and tested single body responsible for regulating
the accountancy profession, and there are no apparent benefits in terms of greater consistency,
effectiveness and efficiency in adding another layer of regulation. Council has emphasized
to the Government that there is a need to maintain a sense of proportion, complexity, and
scale in developing a regulatory framework appropriate for Hong Kong.
30. The substance of the Society’s proposals, in particular, by adding a majority of lay members
to Investigation Committees and Disciplinary Committees, is that the auditor oversight
function is effectively filtered down to the working level as members of these Committees are
directly involved in the monitoring and enforcement of the quality of auditors. Council has
stressed that this approach would be more effective than a passive role of overseeing a
professional body.
31. Council has emphasized to the Government that the nature of the regulatory regime should
not be a primary concern but rather its substance and effectiveness. Council has also argued
that our reform proposals cover not only auditors of listed companies, which is the primary
concern of regulators and the Government, but also auditors of non-listed companies. The
current role of the Society to protect the “public interest” is therefore much wider than the
remit of other overseas reforms that are primarily concerned with protecting investors and
stakeholders of listed companies.
The Need for the Society to retain Disciplinary Powers
32. There has been a suggestion that the Society’s powers to discipline auditors should perhaps
also be moved over to the IIB, if the IIB is established. In this respect, Council has advised
the Government that as long as the Society acts as a licensing body for all its members and
member firms (and not just auditors), supported by the full range of other ancillary functions
(such as standard setting, membership admission, quality assurance and professional
development), the disciplinary powers over its members and member firms for breaches of
professional standards should remain with the Society. There is only one “membership
licence” that a member or firm needs to hold for offering a range of services to clients,
including work for listed companies. The additional licence to practice as an auditor is just
one type of service which a professional accountant may wish to offer or specialize in.
33. Council takes the view that it would be incongruous for powers to discipline to be separated
from the Society as there are public expectations that the Society, being the only licensing
body for professional accountants, should be able to hand down sanctions on its members
over breaches of its standards and in particular the suspension and withdrawal of licences.
The power to discipline any professional accountant (including an auditor) should be retained
by the Society irrespective of whether the misconduct concerns a listed or a non-listed entity.
34. The proposals for a lay majority including a lay chairman on Disciplinary Committees will
ensure independence and transparency of the Society’s disciplinary process. The opening up
of Disciplinary Committee hearings to the public will further add to the checks and balances
to ensure that there is transparency and that the public interest is served.
Powers of the Council, the Investigation Committee and the
Disciplinary Committee
35. The opportunity is also taken to amend the powers of the Council, the Investigation Committee
and the Disciplinary Committee in the light of operational experience.
Council proposes to be empowered to(a) cancel the practising certificate of a practising accountant who is subject to a bankruptcy
order;
(b) compel a member to act in accordance with a direction made by Council, in respect of
registration matters, the conduct of his practice and conduct unbecoming of a professional
accountant;
(c) impose penalties for failure to comply with a direction made by the Council; and
(d) make continuous professional development (CPD) a condition of membership and
practicing certificate renewal.
Council also proposes to empower (a) its Disciplinary Committee to order the withdrawal of a member’s practising certificate
either permanently or temporarily; and to determine the effective date of a disciplinary
order; and
(b) its Investigation Committee to obtain information and documents from any professional
accountant other than the professional accountant who is under investigation.
36. Council also proposes to introduce the concept of consent order in its disciplinary proceedings.
This will empower the Disciplinary Committee to offer the respondent the option of accepting
a consent order when a complaint meets certain criteria, which will define it as a lesser
offence. The criteria will be provided in the Disciplinary Proceedings Rules or other form of
subsidiary legislations. In order for the DC to issue a consent order, the respondent must
admit to the failure and agree to the penalty imposed by the DC. If the respondent does not
accept a consent order, then another DC will be constituted to hear the complaint.
37. In keeping with the transparency principle, Council also proposes to make public the hearings
of the Disciplinary Committee except in circumstances envisaged in Article 10 of the Hong
Kong Bill of Rights Ordinance. The opening up of its disciplinary hearing process has been
endorsed by members after due consultation in 2001.
Immunity Provisions
38. At present, immunity protection is only provided under section 32G of the Ordinance to
persons involved in practice reviews. No similar protection is provided for persons involved
in statutory investigation cases. This is undesirable. Council therefore proposes to provide
immunity to persons involved in statutory investigation. Such immunity would be in the
same scope as that provided under section 32G in line with similar immunity provisions
available to persons involved in disciplinary cases in respect of solicitors under section 8AA
of the Legal Practitioners Ordinance.
39. Furthermore, the Ordinance is also silent on the protection for Council Members, other
volunteer members, officers and staff of the Society in performing duties on behalf of the
Society in good faith. Apart from practice review and investigation functions, the Society is
also involved in disciplinary proceedings and other statutory functions such as registration,
issue of practising certificates and conduct of examinations. There is therefore a need to
expand the immunity provision to the effect that no liability shall be incurred by any person
in respect of any acts or omission by him in good faith in the performance of any functions
under the Ordinance.
40. Council proposes that an omnibus immunity provision in the Ordinance be made to cover
generally such acts by Council and its officers while exercising their statutory powers in
good faith.
Change of Society’s Name and Members’ Designation
41. Accounting institutes in all the major jurisdictions in the world are either called institutes of
chartered accountants or institutes of certified public accountants. The Hong Kong Society
of Accountants (HKSA) is one of the very few that still retains the “Society” name, and its
members are designated “Associates of the Society” whereas most other member bodies in
other countries have used the CPA designation. In recognition of this global trend, Council
proposes to align its corporate brand with the international designation.
42. At the Extraordinary General Meeting of the Society held on 11 November 2002, a resolution
was passed to change the name of the Society, its membership structure and membership
designations and the descriptions of the practice units. Council proposes to make the
corresponding amendments to the provisions in the Ordinance to reflect such changes. The
name of the HKSA shall be changed to the Hong Kong Institute of Certified Public
Accountants, with its Chinese name [ !"# ] remaining unchanged.
Other Miscellaneous Amendments
43. Council also takes the opportunity to make certain miscellaneous amendments, mainly in
respect of disciplinary matters. These include to allow members of the public and profession
aggrieved by a HKSA Council’s decision not to refer a complaint to a Disciplinary Committee
to bring a complaint directly to the Committee; to allow a professional accountant or registered
student to be represented by lawyers or other persons with the leave of the Disciplinary
Committee at its hearings; to redefine ‘dishonourable conduct’ as a disciplinary offence; and
to enable the Court of Appeal to award costs.
44. Also included in the amendments to the Ordinance is the power to allow the HKSA to
prepare summary financial statements for distribution to members.
Amendments to By-laws
45. Section 8(1) of the Ordinance empowers the Society to make by-laws subject to the approval
of the Chief Executive in Council. Council proposes to update some of the provisions in the
by-laws in relation to -
•
Changing the timeframe for Council elections so that members, particularly those residing
or working outside Hong Kong, will have more time to exercise their voting rights (Bylaws 2,3,13-16);
•
Enabling the Society to send out ballots by electronic means and to accept electronic
voting in addition to the existing paper format (By-law 3);
•
Requiring a minimum of 50 members to propose a resolution unrelated to the ordinary
business at an annual general meeting (By-law 15(2)(c));
•
Enabling a Disciplinary Committee to specify the effective date of any disciplinary order
removing a registered student from the register or temporarily prohibiting a registered
student from sitting for examinations of the Society (By-law 35(1));
•
Bringing the disciplinary proceedings for registered students in line with those of
professional accountants by empowering a Disciplinary Committee to make order
regarding the costs of a disciplinary hearing (By-law 35(1)); and
•
Bringing the disciplinary proceedings for registered students in line with those for
professional accountants by formalizing the right to be represented by lawyers or other
person (New By-law 36(A)).
Support of Members
46. Council believes that its members fully recognize the key role they play in maintaining investor
confidence and stability of the financial market. They would also recognize that corporate
failures and irregularities, both overseas and locally, have led to increased public demand for
greater transparency, independence and accountability in the regulation of professional
accountants. Maintaining the status quo is therefore not an acceptable option.
47. Council believes that its proposals to the Government are the best way forward in upholding
the good name of the Society, and therefore its members. It needs members’ support in
taking this significant step forward and making the various other amendments to the PAO
and its By-laws.
Convening an Extraordinary General Meeting (EGM)
48. The proposals set out in this paper will require amendments to the PAO. Council will soon
invite its members to attend an Extraordinary General Meeting (EGM) to pass the relevant
resolution on the full package of self regulatory and other reform proposals as contained in
this position paper that will give Council and our Legislative Council representative, Dr. the
Hon Eric Li Ka-cheung, the endorsement to proceed with the necessary changes to the law
by way of a Private Members Bill.
Hong Kong Society of Accountants
5 June 2003
4th Floor, Tower Two, Lippo Centre, 89 Queensway, Hong Kong.
Tel: (852) 2287 7228
Fax: (852) 2865 6603 / 2865 6776
Web: http://www.hksa.org.hk
Email: hksa@hksa.org.hk