HK targets tighter scrutiny of listed firms' auditors

New Bill will give council independence to probe and discipline auditors, oversee ethics

HONG KONG • Hong Kong, which has faced a slew of criticism on company financial reporting, is set to create a new framework to oversee auditors of listed entities in the city.

Proposed legislation will boost the Financial Reporting Council (FRC) by giving it the independence to investigate and discipline auditors, according to a government statement yesterday.

It will also empower the FRC to oversee ethics and standards in the industry.

The Bill will be introduced to lawmakers next Wednesday.

"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," Mr James Lau, secretary for financial services and the treasury, said in the statement.

This is crucial to strengthening Hong Kong's status as an international financial centre and capital market," he added.

The changes would address concerns cited by the Asian Corporate Governance Association that corporate governance issues were a key reason why Hong Kong in 2016 fell below Singapore in its rankings.

The move also comes amid a broader shift away from self-regulated bodies: Hong Kong replaced its patchwork of industry-run insurance regulators in recent years with a government-funded agency that oversees licensing and supervision.

Hong Kong has fallen behind jurisdictions that tightened their auditor oversight rules after the Enron scandal in 2001, said professor of accounting Paul Gillis at Peking University's Guanghua School of Management in Beijing.

The system of auditor self-regulation is "one of the great weaknesses of corporate governance in Hong Kong", he added.

At least 20 Hong Kong companies have been targeted by short-sellers in the past three years, and in many cases the bearish calls were because of questionable accounting.

The FRC currently investigates public company audits and passes findings to a self-regulated body, the Hong Kong Institute of Certified Public Accountants (HKICPA).

"There is not a lot of confidence in the HKICPA to bring in sanctions on auditors who don't do their job properly," said Mr Jamie Allen, secretary-general of the Asian Corporate Governance Association, and an FRC committee member.

Under the proposed changes, HKICPA will continue to set standards on ethics, auditing and assurance, subject to the FRC's oversight.

The new rules would bring Hong Kong's auditor regulatory regime in line with those at centres such as New York and London, FRC chairman John Poon said in a separate statement.

"It is very important to Hong Kong as a financial centre to have a set of international rules and regulations that are being seen as on a par (with), if not better than other leading financial centres," said Mr Clement Chan, managing director of assurance at accounting firm BDO.

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A version of this article appeared in the print edition of The Straits Times on January 20, 2018, with the headline 'HK targets tighter scrutiny of listed firms' auditors'. Print Edition | Subscribe