|Recent newspapers headlines have featured catchy captions
such as 'Problematic accounts for 75 listed companies',
'Audited financial statements sent to the police and the
ICAC' and 'Regulation of accountants raises controversy'.
Sudden dubious fame indeed for usually media-shy accountants.
I first noticed this unfavourable turn of events as
early as March 1999 and warned the HKSA Council that
a number of newspapers have been developing an editorial
line suggesting that the regulation of auditors of listed
companies needs to be strengthened. I further warned
that the HKSA must quickly rise to the challenge and
deal with this very serious issue.
Following this, it became apparent that the Democratic
Party and the Stock Exchange were lurking on the attack.
As a result, a number of questions were raised before
the LegCo resulting in an agenda item entitled 'Regulatory
Mechanism for Auditors' being set by the Financial Affairs
Panel on 5 July 1999.
This, incidentally, tied in well with the briefing
given to legislators on the Composite Securities and
Futures Bill, which proposes to give the SFC sweeping
powers to access and inspect auditors' working papers,
as well as offering auditors statutory protection when
As accountants, we must reinforce the fact that qualified
accounts are not necessarily problem accounts. It is
even more absurd to assume that auditors are not doing
their job simply because there is a qualification. But
does the public understand this? Apparently not, given
the confusing media reports.
To understand why not, consider Hong Kong's current
economic climate. The recent financial turmoil has taken
its toll on the financial health of many listed corporations.
In some cases, the value of companies' underlying assets
become doubtful, lending to many audit qualifications.
Invariably, a few corporations have fallen under the
weather as a result - and the general public has instinctively
assumed that trained accountants have failed in their
capacity as guardians of actions.
Other more powerful regulators have also picked on
accountants being partly to blame. Politicians and the
Government have seized the opportunity to tighten their
grip on the profession and to force accountants to take
on greater regulatory responsibilities.
This may seem to be an oversimplified account of the
proceedings which has happened in Hong Kong. Following
somewhat similar tracks, the UK's Department of Trade
and Industry, for example, recently published a consultation
document entitled 'A framework of independent regulation
for the Accountancy Profession' in November 1998.
The paper sought to explain the different options for
regulation and the reasons for which the UK Government
had reached the conclusion it had. The proposed framework
covers every aspect of the accountancy profession, not
just company audits, insolvency work and the investment
sector. At the same time the UK's accountancy profession
has developed its own proposals for the way forward.
It is based on this already emerging international
trend that I made the following widely publicised statements
during the Legislative Council's Financial Affairs Panel
on 5 July 1999:
The HKSA should keep an open mind
in regard to change and should be proactive in developing
its own proposals to fulfil its statutory self-regulation.
We are the professional watchdogs
of company accounts, but not "economic police
of the Government"
The Government and other regulators
such as the SFC and the Stock Exchange should first
deal with companies and their management to identify
the real corporate issues before the HKSA can deal
fairly with the auditors.
The public and the Legislators should
be reminded that the HKSA's statutory power is very
strictly limited by legislation to deal only with
accountants. The modest investigatory powers we
have can only be invoked where reasonable cause
is clearly established.
When dealing with auditors, the HKSA
must respect the need to protect the confidentially
of clients' potentially business sensitive information.
However, this does not mean that we cannot strive
for great transparency to ensure that the public
can see that justice is served.
The HKSA should accept greater participation
from other regulators and laypeople in our profession,
but vice versa, we should have a greater say in
how other regulators such as the SFC and the Stock
Exchange work. Otherwise, we can easily be picked
on and assigned an unfair proportion of blame for
corporate failure even before management is properly
brought to task.
We should consider a more active role
in fraud reporting and even provide some guarded
access to our working papers, provided there are
proper checks in place, e.g. a judiciary procedure
where auditors are entitled to legal representation
and where the SFC documents all its discretionary
powers in clear practice notes.
It would appear that the accountancy
profession is being 'victimised' if it were to be
signed out for additional responsibility. Many other
intermediaries can also help in the implementation
of corporate governance, e.g. company secretaries,
financial advisors, lawyers and senior management.
I fear that the recent spate of publicity is only the
beginning of long and tough legislative bargaining as
the Composite Securities and Futures Bill is gradually
introduced during the second half of this year. I have
therefore urged the Administration to exercise great
caution in handling this rather reformatory Bill - our
critics will no doubt be judging us on how well we are
doing our job, ready to make their next move.
It is time for us to keep our vigil and search deep
in our hearts to see whether or not we want to 'bite'
as well as 'bark' as the watchdogs of company accounts.