There have been increasing concerns about the standards and competence of the city's auditing practices, after the Financial Reporting Council put 13 listed companies on watch for alleged auditing problems. Hong Kong should move towards enhancing the reliability of financial statements and improving the regulatory regime for auditors.

The disquietude among the public led the Legislative Council to take up consideration last June of Clause 399 of the Companies Amendment Bill. The clause, for the first time, would make auditors criminally liable for omissions in their professional work, with or without dishonest intent. Offences were to be punishable by fines up to HK$150,000 for any auditor, who knowingly or carelessly omitted relevant facts in the audit report.

The clause specified that liability would apply, (i) if financial statements are not in agreement with the accounting records in any material respect; or (ii) all necessary and material information and explanations for the audit have not been obtained. Unfortunately that powerful measure means in effect that law enforcement does not have to prove that the omission were made dishonestly or with intent to defraud before a prosecution could be initiated, followed by conviction. In short, incompetence and recklessness (sometimes taken as gross negligence) would become criminalized.

The draconian effect was added with the highly discriminatory threshold that the bill would not apply to non-Hong Kong companies that represent some 75 percent of the market capitalization of the Hong Kong stock exchange. It will create a disadvantage for auditors of Hong Kong companies over auditors working for non-Hong Kong companies. Not unexpectedly, an amendment to Clause 339 to be applied to any auditor without a practising certificate did not pass through the legislature and the clause was simply removed from the Companies Bill.

It seems we now have another opportunity to ensure Hong Kong can keep its international reputation as a financial center, by setting the right standards for regulating the quality of audits. Back in August, the International Ethics Standards Board for Accountants (IESBA) published new requirements that address a professional accountant's responsibilities regarding the disclosure of suspected illegal acts committed by a client or employer.

The proposals describe the circumstances in which a professional accountant is required or expected to breach confidentiality, one of the five fundamental principles in the Code of Ethics for Professional Accountants (the Code), and disclose the act to an appropriate authority.

In its Exposure Draft, "Responding to a Suspected Illegal Act", the IESBA proposes the adding of two new sections, addressing illegal acts to the Code. There would be one each for professional accountants in public practice and professional accountants in business. There would also be several revisions to other related sections. The new sections attempt to delineate clearly the expected course of action for a professional accountant, if those charged with governance do not respond to the issue appropriately.

Confidentiality is one of the five fundamental principles of the Code. The principle imposes an obligation on all professional accountants not to disclose outside their accounting firm or employing organization confidential information, acquired as a result of their professional and business relationships, unless there is a legal or professional right or duty to disclose.

The proposals are unprecedented and the accounting profession will no doubt take a critical look at what is now proposed. The new proposed changes will no doubt need to be fine tuned to prevent any excessive burden and to have a clear demarcation of what can be disclosed and what should not be.

However, at the same time the accounting profession and its insurers for professional indemnity polices will no doubt be aware that a professional code that gains public confidence will serve the interests of preventing expensive litigations for professional negligence. Only with positive attitude can Hong Kong maintain its high reputation in its professional services.

The author is a HK barrister and chairman of the Hong Kong Bar's Special Committee on Planning and Policy.

(HK Edition 10/31/2012 page3)