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 discussions.

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 foolish”.

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.