An auditor regulatory regime for HK that is at least on par with other major international financial centers needs to be established, said FRC

The Hong Kong government said it proposed to expand the power of an agency to supervise auditors of public listed companies. The move is to improve the quality of the city's financial reporting and ultimately boost investor protection.

The government, which aims to empower the agency, Financial Reporting Council (FRC), in its public consultation paper on proposals to improve the regulatory regime for listed entity auditors, said, "We further propose to vest in FRC disciplinary and inspection functions and powers with regard to listed entity auditors, in addition to its existing investigatory functions and powers."

FRC said the proposed change seeks to establish "an auditor regulatory regime for Hong Kong that is at least on par with other major international financial centers."

In a statement, John Poon, chairman of FRC, stressed that his agency is "a statutory body independent of the audit profession." As such, it will supervise the Hong Kong Institute of Certified Public Accountants (HKICPA), in disciplining auditors of public listed companies. The institute's other functions do not come under this arrangement.

Hong Kong's existing rules for listed entity auditors are not consistent with international standards and practices that the oversight of the regulation of listed entity auditors should be independent of the profession itself, said the Financial Services and the Treasury Bureau (FSTB).

A study issued by FRC in October 2013 says that audit regulators of major countries, such as the United Kingdom, the United States, Canada, Australia and Singapore, are independent of the profession.

The International Monetary Fund (IMF) also expressed concerns about the lack of independence of Hong Kong's present rules for listed entity auditors and has made recommendations for improvement in a recent report.

But HKICPA stressed on Tuesday that it is critical to have clear separation of inspection and disciplinary responsibilities and activities within the regulatory body.

"Introducing a model where all power and decision making is concentrated in a single entity within the FRC is totally unacceptable and not supported by models of auditor regulation operated in other significant jurisdictions," said Clement Chan, president of HKICPA.

John Poon indicated that the council is committed to ensuring that the future ruling system is fair, and all principles of natural justice will be afforded to all parties concerned. "FRC will implement appropriate measures to separate the investigative and disciplinary functions," he said.

HKICPA also disagreed with the proposed maximum financial penalty of the listed entity auditor, "The greater of HK$10 million or three times the amount of the profit gain or loss avoided by the listed entity auditor as a result of the irregularity". The institution suggested to set the number to HK$ 5 million and to set up clear and strong guidance on how to determine the appropriate amount of a penalty. Many small- and medium-sized firms have expressed their view that the figure is too high and may drive firms out of the listed entity audit market, the institution said.

Roy Lo, one of the initiators of Mid-Tier Firm Alliance, said the stricter rules are very positive for the market, but the government has to take fairness into account and prevent a monopoly of large accounting firms.

As of March 31, 2014, a total of 18 overseas auditors are accepted in auditing overseas-incorporated listed companies while 11 mainland auditors are auditing mainland-incorporated listed companies. Besides, 4 overseas auditors are accepted in auditing overseas collective investment schemes listed in Hong Kong.

The government proposes that an applicant for recognition as an overseas auditor of a specific overseas entity listed in Hong Kong must meet one criterion that there must be an agreement of mutual or reciprocal cooperation arrangement between the overseas regulator of the auditor and FRC.

HKICPA have concerns over how effective regulation of these non-Hong Kong auditors will be achieved as auditor regulation is not converged internationally and there is very little precedent for effective existing cross border regulation.

"To enhance investor confidence and protection in an international business environment there needs to be confidence that auditor regulation is equally robust across jurisdictions," the institute said.

FSTB suggested that both Hong Kong and overseas auditors should be monitored by the same independent ruling body in the future. The law will also clearly set out the eligibility criteria for recognition of overseas auditors, and they are subject to the same ruling requirements and disciplinary mechanisms with the local auditors, the bureau replied to China Daily's enquiry in an email.

felix@chinadailyhk.com

(HK Edition 09/19/2014 page8)