¡@ ªð¦^ Back

Reassured but vigilant

(Article to Journal of the Hong Kong Institute of Securities - June 2002 Issue)

Standfirst:  Legco¡¦s Eric Li insists the necessary protection from Enron fall out was in place before the event

Overall the Hong Kong financial community took the news of Enron¡¦s ignominious downfall calmly and rationally but not complacently. The government is acutely aware of its responsibilities to the finance community and the investing public and in the instance of Enron, the patent for reassurance. It is important to note that even before the Hong Kong Society of Accountants (HKSA) was called to appear before Legco¡¦s Financial Affairs Panel there had been discussions between the government and the accounting profession regarding Hong Kong¡¦s position vis-à-vis the circumstances surrounding the Enron collapse.

I¡¦m happy to say that representatives of the accounting profession were fully able to convince the government that the accounting rules by which Hong Kong accountants abide are quite different to those followed in the US. By that I mean that while the International Accounting Standards, which we and the rest of the world aspire to, do not specifically prohibit the sort of Special Purposes Entity accounting which took place at Enron, they do, with their principle-based approach ensure that such practices would not be countenanced.

In fact, some years back Hong Kong¡¦s banking community and the Hong Kong General Chamber of Commerce had become aware of accounting trends in the US, which would allow for the sort of equity accounting for SPEs that we have become familiar with since the Enron scandal broke, and lobbied the government and the accounting industry for similar freedoms. But, quite rightly in my opinion the proposition was rejected by both parties. Such resistance has paid dividends in the sense that with regard to such accounting arrangements we appear to be on safe ground.

While such precautionary measures may have afforded us a measure of safety we, by which I mean the government, remain on our guard. The current high level of awareness with regard to the need for high standards of corporate governance gives us the perfect opportunity to implement those standards. However, we are a small business community compared to many of our rivals in the west and it would be inappropriate to take measures that have not already received acceptance in other developed financial markets.

Currently the US and UK markets are taking a very measured approach to the Enron phenomenon. Endless data will have to be studied and ultimately decisions will depend on the outcome of the litigation. Meanwhile Hong Kong will continue to monitor international measures to improve corporate governance while simultaneously updating our own laws and regulations.

Accounting for accountants

The potential for conflict of interest as a result of an accounting firm offering clients both audit and consultancy services has been subject to enquiry by Legco. It is fair to say that Legco has been reassured in the Hong Kong context largely due to the nature of the territory¡¦s prevalent way of doing business. It is a fact that most companies are run by families whose control of the company is so strong and exclusive that there has been very little demand for professional consulting services. It is therefore the case that professional consulting has never really taken off in Hong Kong.

The public should also be aware that the HKSA has implemented ethics guidelines which alert accounting professionals to potential conflicts of interest. Strengthening these internal guidelines is an ongoing process that remains mindful of the possibility of overkill. Much of the publicity surrounding Enron has given a naïve but nevertheless false impression that any services provided by an auditor other than the audit itself could lead to a conflict of interest. This is patently not the case. In many cases the auditor¡¦s familiarity with the client¡¦s business means the auditor can be of assistance speedily and less costly without compromising the audit.

Both the Hong Kong accounting profession and the government have serious reservations about heavy handed moves adopted by one or more jurisdictions that have insisted that auditors be rotated after a period of three to five years, particularly where the client is a bank or other financial institution. When one considers the number of major accounting firms remaining, is the proposition practical? More fundamentally, if you trust the integrity of the profession, why treat it in such a superficial manner? It may look like a good notion on paper but in fact there is a very real risk that quality and efficiency of service will be sacrificed.

Finally, on the matters of independence and accountability of the profession I am dismayed to discover that in certain quarters there is a perception that at the committee level of the HKSA these bodies are open only to accountants. This is not the case. There are many lay members on the various planning committees. On the disciplinary committee there are representatives from the Law Society and the Bar Association while on the user committees members of the SFC and people from the business community are well represented. The current balance of representation is not static and the HKSA is continuing in its purpose of increasing lay participation in the deliberation process.

There is a proverb which tells us that every cloud may have a silver lining. Enron has been such a cloud. The silver lining is its ability to act as a catalyst in further defining and unifying the accounting practices around the world.

ªð¦^ Back