Empowered regulator to up Hong Kong’s accounting regulation standard

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Hong Kong auditors are expected to be under greater scrutiny, as newly proposed legislation may see the Financial Reporting Council (FRC) gaining more power to penalize firms violating corporate governance.

FRC is an independent statutory body set up by the Hong Kong government in December 2006, as part of the requirement under the global standard. As of now, the council only handles enquiries and investigations, while the Hong Kong Institute of Certified Public Accountants (HKICPA) carries out the other regulatory functions.

The proposed bill, if passed, would give the audit watchdog independence from auditors and the power to inspect, impose penalties and discipline auditors of companies listed in Hong Kong, the government said, adding that the move would help to safeguard investors’ interests. Some, including HKICPA’s former president Mabel Chan Mei-bo, have openly supported the decision to enhance independence of the regulation of auditors in order to match international practices.

“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,” said James Lau, the secretary for Financial services and the Treasury. “This is crucial to strengthening Hong Kong’s status as an international financial centre and capital market.”

The bill was presented to lawmakers this week and would be discussed in the coming months before a final vote is taken. Local analysts and authorities expect the push would empower FRC as an independent body and thus qualify it to join the International Forum of Independent Audit Regulators, which Lau describes as “an important forum for international co-operation on the regulation of auditors”.

John Poon, chairman of the FRC, describes the reform as a “much awaited” one, saying it would bring Hong Kong’s auditor regulatory regime one step closer to other major capital markets worldwide, including New York and London. “The introduction of this legislation is in the best interest of the investing public,” says Poon.

However, findings revealed concerns that the newly empowered regulator may not have sufficient resources to do its job.

As stated in FRC’s 2016 annual report, the regulator’s budget for the year was HK$29.4 million (US$3.76 million), and it had a headcount of merely 22. The Hong Kong government has proposed to increase the yearly budget to HK$90 million.

This is compared with the US$250 million and EUR35 million for its US and UK counterparts have to handle their accounting regulations, respectively. The numbers seem to suggest that the Hong Kong accounting regulator is quite some way behind and supports concerns that it is perhaps under-budgeted.

While voices coming from HKICPA said the HK$90 million budget is too high, the fact is it is actually lower than other regulators in Hong Kong.

For example, the recently established Insurance Authority has hired 180 people since its inception in June 2017, and has a budget of HK$650 million for its first four years of operation.

FRC’s budget is also behind the Securities and Futures Commission’s (SFC) HK$398.28 million (US$50.91 million).

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