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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.
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