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 by giving it the independence to investigate and discipline auditors, according to a government statement Friday. It will also empower the FRC to oversee ethics and standards in the industry. The bill will be introduced to lawmakers on 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,” 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 center and capital market,” he said.
If approved, 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 slipped below Singapore in its rankings. The move 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 Paul Gillis, professor of accounting 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 said.
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 11-year-old FRC currently investigates public company audits and passes findings to a self-regulated body, the Hong Kong Institute of Certified Public Accountants.
In a statement on Friday the HKICPA said it wanted more information on how the FRC’s proposed HK$90 million ($11.5 million) budget would be funded and had concerns a maximum penalty of HK$10 million would be onerous for smaller firms. HKICPA will continue to set standards on ethics, auditing and assurance under the new legislation, subject to oversight by the FRC.
New York and London
The new rules would bring Hong Kong’s auditor regulatory regime in line with centers 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 center to have a set of international rules and regulations that are being seen as on par, if not better than other leading financial centers,” said Clement Chan, managing director of assurance at accounting firm BDO Ltd.