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Further Reform of Regulatory Regime of Accounting Profession

The accounting profession plays a crucial role in assuring the integrity of financial information, and it is fundamental to the business and financial market operations of Hong Kong. A robust regulatory regime of the profession is also essential for maintaining the status of Hong Kong as an international financial and business centre. In 2018, the Government proposed amendments to the Financial Reporting Council Ordinance, transferring the powers to regulate auditors of PIE[1] from HKICPA[2] to the FRC[3]. This reform marks the beginning of having an independent regulatory body for the accounting profession, aligning our practice with major economic and trade partners, for example the Mainland, UK, US, Singapore and Australia. Back then when we first introduced the reform, we have mentioned that a gradual and step-by-step approach will be taken, and now it is the opportune time for us to take the next step.

The new regime has been in operation for more than 1 year, and the FRC has delivered a number of achievements as an independent regulatory body, including:

  1. Regulatory functions: FRC has completed the first annual inspection work on PIE auditors, covering their engagements and quality control systems. Reports have also been issued on its first oversight assessment, and the overview of the market for listed entity audits in Hong Kong.
  1. Focused research: FRC has conducted research on whether the change of auditors for listed companies would warrant regulatory intervention. It has also researched on how the boards of listed companies can more effectively supervise the production of financial statements and conduct internal audit.
  1. Regulatory cooperation: FRC signed a Memorandum of Understanding (MOU) with the PRC Ministry of Finance on collaboration in respect of audit regulation, and the FRC has successfully obtained the first batch of the audit working papers of Hong Kong listed companies kept in the Mainland. A new MOU on regulatory cooperation was also signed between FRC and SFC[4] this year, and more such cooperation arrangements are now being discussed by FRC including those with the HKEX[5] and ICAC[6].

The above achievements are the results of FRC leveraging its strengths as an independent regulatory body, and these strengths would be conducive to the enhancements of Hong Kong’s status as an international financial and business centre.

Further independent regulation, enhance professionalism

Since the new regulatory regime has been operating smoothly, and the FRC has delivered a number of achievements, the Government will commence the next step of reform and further the independent regulation of accounting profession. We propose to expand the powers currently vested with the FRC, including inspection, investigation and discipline of PIE auditors, to cover all auditors, i.e. including all Certified Public Accountants (Practising), Practice Units and Certified Public Accountants. Transferring these major regulatory powers on the conduct of professional accounting practitioners to FRC will ensure the independence and impartiality of the regime, effectively avoiding sole reliance on “self-regulation”. Moreover, to tie in with the increased coverage of FRC’s regulation, we also propose that the powers of registration of practice units and PIE auditors and issuance of practising certificates be vested with FRC, so as to rationalize and consolidate its regulatory powers.

After the reform, HKICPA can build on its past successes, and focus on standards-setting and long term development of the profession, including the registration of Certified Public Accountants, training and examination, setting of continuing professional development requirements, and setting of standards on professional ethics, accounting, auditing and assurance, and continue to play a key role in enhancing the professional standards of the industry. The FRC’s existing oversight power over HKICPA will also be expanded to cover these statutory duties.

At the same time, we look forward to HKICPA implementing its strategic plan 2020 – 22 announced previously, building trust continuously for the industry, and getting more prepared for future development.

Reduce compliance burden, enhance regulatory efficiency

Besides furthering independent regulation, our proposed reform will also reduce compliance burden on the industry and enhance regulatory efficiency. Under the existing regime, FRC and HKICPA conduct inspections on Practice Units targeting their work for listed and non-listed companies respectively, and also conduct separate investigations and discipline actions on Practice Units and CPAs using the same professional standards. A divided regulatory approach has unavoidably increased the compliance burden on the industry, and weakened the efficiency and consistency of regulation. The next step of reform will consolidate the overall regulatory arrangement, and allow us to cope with a financial market that is increasingly active and diverse in terms of geographical sources and business scopes.

Conclusion: Working hand in hand to start a new page of reform

Vesting powers to an independent body is in line with prevailing international practices for the regulation of accounting profession, and it will ensure impartiality and robustness. Also, since the FRC has been performing its functions smoothly, it is now a right time for it to take up more responsibilities. To reflect its expanded roles and functions, we propose that the FRC be renamed as AFRC (Accounting and Financial Report Council).

We are now in the process of drafting the relevant legislative proposal, and we also started engaging key stakeholders, including associations, professional bodies, industry representatives and audit service users, to explain the reform proposal. I met with HKICPA, SCAA[7], AWAHK[8], ADF[9] and HKBAA[10] earlier, and learned that representatives are broadly supportive of the reform direction, and will maintain close dialogue with us, especially on the transition arrangement for small and medium practices. I look forward to working with the industry hand in hand to implement the reform, and set a more solid foundation for the regulatory regime of accounting profession and the development of Hong Kong as an international financial and business centre.

[1] Public Interest Entities

[2] The Hong Kong Institute of Certified Public Accountants

[3] The Financial Reporting Council

[4] Securities and Futures Commission

[5] Hong Kong Exchanges and Clearing Limited

[6] Independent Commission Against Corruption

[7] Society of Chinese Accountants & Auditors

[8] Association of Women Accountants Hong Kong

[9] Accounting Development Foundation

[10] Hong Kong Business Accountants Association

8 June 2021