It was such a relief to have finally delivered
the chunky 678 pages Public Accounts Committee¡¦s report
last week. This report was actually quite timely as
the role of the Audit Commission and, co-incidentally,
the role of private sector auditors seem to have been
the subject of a number of recent public debates.
I am of course referring to the investigation undertaken
by the KCRC on the management of its engineering contracts
and the spin-off effects of the Enron saga that first
exploded in the United States earlier this year. As
the political representative of accountants in Hong
Kong, perhaps I can help shed some light to these public
First of all, as chairman of the Public Accounts Committee,
I find it very gratifying that the role and integrity
of the Audit Commission is unquestioned and that it
is so widely accepted by the public. At a time when
the government is struggling to balance its own books
and is desperately trying to show its resolve to tackle
a monumental structural deficit, the visibility of the
Audit Commission enhancing government efficiency will
no doubt help its credibility.
Nonetheless, even I would admit that having good accountants
around might not be the solution to every financial
ill and wrongdoing. Looking at government expenditures
from a simple accounting point of view it is easy to
spot the root problem and to prescribe the necessary
medicine. However, as a community, are we prepared to
swallow the bitter pill and pay the full price to resolve
the current deficit problem?
It is common knowledge that the remuneration of civil
servants makes up some 70% of public sector costs, while
the lion's share of the remaining portion is comprised
of capital expenditures including roads, railways and
community facilities. There really is little room for
significant savings elsewhere.
In the handling of civil servants' remuneration, the
government has become hopelessly trapped in a cocoon
of inflexible rules and conventions that were created
over a long period of time. At present, no immediate
solution is in sight and as usual private sector consultants
will be called in to break the stalemate.
Allocating capital expenditure to physical infrastructure
projects is a somewhat different problem. Despite the
government's proper intention of investing in the future
development of Hong Kong and helping create jobs in
the short term, capital expenditure should not be viewed
as a license to squander astronomical sums of public
funds without full regard for getting value for money.
The controversial $22 billion Route 10 is a good case
in point. The government and the community should play
a role in deciding how public funds are allocated with
each project being considered on its own merits, on
a case-by-case basis. I believe that my fellow lawmakers
would not hesitate to exercise financial veto powers
if and whenever necessary.
When the Financial Secretary, Mr. Anthony Leung delivers
his maiden Budget speech on 6 March 2002 all eyes will
be watching how he plans to tackle the current Budget
deficit which is at an all-time high. Personally, I
do not think he can get away with a Budget that does
not squarely address the two most important expenditure
items - civil servants' remuneration and the allocation
of public funds. The inability of the government to
control its own pay structure and capital investments
gives the impression that it is ¡§penny wise but pound
On a different note, the tide seems to have turned
in the case of KCRC. When the government has a problem,
you can rest assured that it will seek immediate advice
from consultants in the private sector. In this case,
when there was a problem with KCRC, members of the public
called on the Audit Commission for help!
This reflects the high esteem in which the public
holds the Commission and, less overtly, the typical
knee-jerk reaction of Hong Kong people to major world
events, i.e. the Enron saga. I wonder how many of those
who were quick to call foul on KPMG actually understood
how completely different were the facts and circumstances
of the two cases!
In response to calls for the Audit Commission to serve
as auditor for KCRC, I would like to explain why I think
it might not be entirely appropriate.
KCRC is obligated by statute to run our railways along
commercial principles. Accordingly, it plans to seek
a listing on the Hong Kong Stock Exchange in the not-too-distant
future. In the usual course of business, the Corporation
often has to borrow funds and some of this borrowing
could well involve international financial institutions.
The international financial community would find it
strange if KCRC accounts were audited by a government
agency, as this would cast doubts on the government's
declaration that KCRC is run strictly according to commercial
principles. If KCRC is to seek a listing in the next
few years, to satisfy existing listing rules it might
have to find another private sector accountant to prepare
once again the accounts spanning the last three years.
As the Audit Commission is not presently licensed as
a Certified Public Accountant firm, it does not have
to comply with professional standards nor does it bear
professional liability for its work. As government officials,
Audit Commission cannot be sued in civil court for the
delivery of its services as auditors either and thereby
do not offer the same level of protection as their private
sector counterparts to users of accounts liabilities.
To avoid any potential embarrassment just in case something
slips, new rules would probably have to be created for
Audit Commission dealings with other government departments,
e.g. the filing of tax returns and complying with practice
codes of government regulators. In short, the Audit
Commission and its staff are not in a position to take
on the professional and commercial risks of a private
sector CPA firm.
The Audit Commission has, however, another very useful
role to perform in the context of KCRC. Since the government
is the sole shareholder and internal auditor of the
Corporation, it is well suited to investigate suspected
mismanagement and wrongdoings. I also believe that the
occasional ¡§value for money audit¡¨ performed on specific
areas of business at the invitation of the KCRC management
would add value and credibility to its public standing.
However, the fact that the Audit Commission is both
well suited and well qualified to do the work does not
mean private sector accountants who are equally well
qualified should be excluded. In the spirit of good
corporate governance, we should first give the management
lead by its new chairman the chance to right its own
wrong. To avoid giving the impression that KCRC is just
another government department, the Audit Commission
should be used only as a last resort.
Credit: Eric Li is the LegCo Accountancy
Functional Constituency Representative. For more information,
refer to his website at http://www.ericli.org.