Auditing Regulation in Hong Kong

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Table of Contents

Introduction
Evolution of auditing body in Hong Kong
Code of Ethics for Auditors in Hong Kong
Regulation of auditors in Hong Kong
Adequacy of Auditor’s Regulation System in Hong Kong
Conclusion
Reference List

Introduction

The field of auditing has successively transformed itself from an amateur field in early 13 century to its mature current form in the 21 century (Gul, 2007). Today, the field is seen to have transformed itself into a developed complex system that is guided by formulated ethical, legal, and economic standards. At the same time, majority of present day auditors perform their functions independently as professionals. This can be evidenced not only in the actions of auditors to provide credible audit reports but also in providing assurance services for wide variety of business activities (Gul, 2007). Thus, the modern day auditors are believed to enjoy distinctive professional status in the society. In its origin, auditing has its place largely in western countries but over time, it has evolved to other societies like Hong Kong. In Hong Kong, auditing has played a major role in transforming the society as one of the reputed international centers for finance and business (Gul, 2007). The country regulates auditors and other financial reporters through a credited body known as the Hong Kong Institute of Certified Public Accountants (HKICPA). It is this body that today oversees all aspects of ethics, responsibility, and duty as it pertains to auditing in the country.

Over time, HKICPA has transformed the field of auditing in the country and it is in this respect that this research paper aims at making analysis and evaluation at the adequacy of the current system of regulation of the auditing profession in Hong Kong. Generation of useful information will largely involve carrying out literature review of secondary data sources. The secondary data sources in this case will include books, journals, and reliable internet sources. Information generated will be in tandem with the objective and purpose of the research.

Evolution of auditing body in Hong Kong

England is credited as the place where first professional bodies were initiated (Gul, 2007). From here, there was wide dispersal of these professional bodies to other regions like United States, Australia, Canada, Hong Kong, Malaysia, Singapore, and other countries (Gul, 2007). British colonized Hong Kong and it is from this basis that auditing and the entire accountancy field in Hong Kong was pioneered by British in the country (Gul, 2007). At that moment, the British accountants and auditors had their head office in Britain. As a result, no formal accounting body existed and operated in Hong Kong until 1973 when the Hong Kong Society of Accountants (HKSA) was formed (Gul, 2007). Before the formation of this body, there existed the Authorized Auditors Board that was regulated by the Government’s Registrar of Companies, which ensured the registration of accountants for public service. Therefore, the emergence and operation of this body was seen as a first and vital step in the growth of auditing field.

Immediately the society was formed, it started to expand its networks and cooperate with international bodies (Lulu, 2011) where in 1977 the society officially became a member of the International Federation of Accountants (IFAC). The year 1982 became critical for the society, since it was during this period that the society established the Accounting Standards Committee mandated to prepare and issue accounting standards in the country. Further, during the same period, there was the initiation of the Joint Examination Scheme with the Association of Chartered Certified Accountants (ACCA) for all accountants in the country (Gul, 2007). Much more, in the year 1995, the society became a credited and associate member of the International Accounting Standards Committee (IASC) team where before this there was in 1994 the establishment of the Steering Committee on Professional Accreditation to guide and manage the society’s independent need to set its own examinations (Gul, 2007).

In 2004, the Hong Kong Society of Accountants (HKSA) was transformed into the Hong Kong Institute of Certified Public Accountants (HKICPA) which today constitute the only statutory body permitted to license accountants in the country (Siu and Ku, 2009). At the same time, this body that has been vested with the responsibility of enacting and ensuring regulations and standards of accountancy profession are in place and existence (Siu and Ku, 2009). Since its formation, HKICPA has been at forefront in ensuring that quality and status of the accounting field in Hong Kong is upheld with dignity and professionalism (Gul, 2007). The role in terms of success that are associated with HKICPA include increase in the number of membership from 4,754 in 1989 to over 26,000 members by the end of 2007 and the number is predicted to grow in future (Gul, 2007). Nevertheless, it has been observed that in future, HKICPA will continue to play a bigger and important role in both Hong Kong and the region.

Code of Ethics for Auditors in Hong Kong

As it was expressed earlier in the text, accountants in Hong Kong have acquired a professional status in the society and therefore they have to be ready to operate under conditions set in order for them to be considered as professionals (Sale and Sale, 2001, p.182). First, before any discipline can be regarded as profession there are certain conditions such discipline has to fulfill or accomplish. The conditions include the discipline need to be premised on the motive of public service and that the discipline needs to have complex body of specialized knowledge (Gul, 2007). At the same time, the discipline should have limited admission to the right of admission, it should have an international recognition, and it should exhibit commitment to the current professional practice (Gul, 2007). Moreover, a discipline only graduates as a profession when there is existence of a voluntary organization that always aims at regulating and improving the discipline and lastly, there should be a code of ethical conduct (Gul, 2007).

In Hong Kong, what is evident is that the larger public demands that accountants be classified and regarded to be professional need to operate under and observe a high ethical standard as this will accelerate the public confidence in the entire accountancy profession (Kiernander, n.d). As a result, members of the accounting body in Hong Kong are expected to comply with the Code of Ethics for Professional Accountants established by the HKICA (Kiernander, n.d). In almost all situations members are expected to abide by the regulations of the code of ethics in cases members abrogate this requirement then there is always disciplinary action on such members. Some stringent disciplinary measures may include automatic dismissal from the members’ body and revocation of the operating license for such members. Therefore, some of the guidelines established under the Code of Ethics for Professional Accountants in Hong Kong are discussed below. It must be noted that part A and B of the Code constitute the relevant part for the auditors and this is the section that will be analyzed in this research paper. Part A talks of fundamental ethical principles that all members have to abide by. More so, in this part A, there are established guidelines with relation to threats and safeguards associated with the fundamental principles. As a result, accountants in Hong Kong are required to operate under the guidance of five major principles.

The first principle has to do with integrity, where honest is required on the part of the auditor in carrying out his or her duties (Kiernander, n.d). Next principle has to do with objectivity where professional auditors are restrained from all forms of bias, conflict of interest or even undue influence in carrying out business or making judgments (Hong Kong Institute of Certified Public Accountants, 2008; Kiernander, n.d). The third principle has to with professional competence and due care, whereby the auditor is seen to have the duty of continuing and maintaining the professional knowledge and skills with regard to the dynamics in the profession. More so, the auditor has to be fully versed and updated with the current developments in the practice, legislation, and techniques as the field embraces changes (Kiernander, n.d). Principle 4 explains the need and importance of confidentiality, whereby, a professional auditor has to ensure confidentiality of information obtained when carrying out duty, should retain secrecy, and not to disclose to third parties. Nevertheless, the auditors are advised that such information should only be disclosed within proper and legitimate authority and legal requirement (Kiernander, n.d). Last principle has to do with overall professional behavior, every auditor is expected to respect and abide by all the relevant laws and regulations available, and more importantly refrain from all actions that may paint the profession in bad image (Hong Kong Government News, 2011).

Part B of the code reinforces part A by outlining how the principles should be applied by accountants in carrying out their duties. As a result, this part B of the Code of Ethics is sub-divided in sections of: professional appointment, where an auditor has to weigh all reasons, options, and alternatives available before accepting any auditing duty (Kiernander, n.d). Sub-section two deals with conflicts of interest in which case auditors are required to identify all possible elements that may pose conflict of interest in their duty. Other sub-sections in this part B have to do with fees and types of remunerations for auditors, marketing of professional services by accountants and auditors, gifts and hospitality, custody of client assets (Kiernander, n.d). In addition, these sub-sections are included: objectivity, independence of professionals and more importantly this part outlines ways of solving ethical dilemmas for accountants (Kiernander, n.d; Kwok, 2008, p.20).

Regulation of auditors in Hong Kong

Before looking at how regulation of auditing activities in Hong Kong is carried out, it is important to note one major influence on the practice of auditing. Development, growth and function of auditing has benefited from the role played by the International Federation of Accountants (IFAC) which has been at forefront in developing and implementing international auditing standards (Tohmatsu, 2008). IFAC principles and requirements for auditors remain dynamic especially with the emergence of globalization of business and commerce (Graham, 2007). Consequently, IFAC designed the Global Quality Standard for auditors. The requirements of this Global Quality Standard include reframing national auditing policies to reflect or be in line with the International Standards of Auditing (Gul 2007). Second, all auditors around the world to operate within the limits of IFAC Code of Ethics while at the same time, creating training programmes to keep partners and staff up to date on international developments in financial reporting (Anonymous, 2011). Lastly, to ensure there is preservation of quality control standards there should be regular quality assurances exercises that will help monitor the compliance of the body’s policies especially with regard to compliance with international auditing standards (Burkholder, 2011).

In Hong Kong, duties, functions, responsibilities and liabilities of auditors is found in numerous legislations enacted, quasi-legal instruments, the audit contract, together with common law and equity (Gul 2007). As a result, the major statutory sources of authority in Hong Kong can be found: in the Companies Ordinance (Cap 32) regularly known as CO (Hong Kong Institute of Certified Public Accountants, 2010). Further, auditor’s duties, functions, responsibilities, and liabilities are further defined by the HKICPA, which has clearly set out Hong Kong Standards on Auditing (HKSAs), Auditing Guidelines (AG), and the Practice Notes (PNs) usually refined from time to time (Gul 2007). Standards or requirements set by these various regulation bodies provide auditors with detailed guidance in key areas that sometimes legislation has not provided for. Generally, there is that need for auditors to comply with the standards which when achieved results into good practice. Without forgetting, it must be stated that auditing standards enjoy some legal status and recognition and in most cases provides for that strong evidence that a proper standard has been adopted and followed in the auditing process (Rathore, 2009). When auditing standards are observed and respected, the understanding is that there is little likeliness of incurring mistakes and related unethical issues by professionals when carrying out their duties (Hong Kong Government News, 2011). The legal power of auditing standards can be captured in the ruling made by Justice Woolf in Lloyd Cheyham and Company vs. Littlejohn Company (QBD) in 1985 (Gul 2007). In the case, the judge noted that,

“While they are not conclusive, so that a departure from their terms necessarily involves a breach of duty; and while they are not clear, rigid rules they are very strong evidence as to what is the proper standard which should be adopted, and unless there is some justification, a departure from this will be regarded as constituting a breach of duty” (Gul 2007, p.63).

In summary, it can be said that Hong Kong regulation of auditors’ activities is carried out under formal established standards by the relevant statutory bodies. Whichever statutory body may apply, it is always necessary for auditors to respect and operate within standards established and in cases where some auditors do not comply with these standards then such auditors have to justify the reasons for departure. At the same time HKSAs as a body makes it mandatory for all auditors to exercise professional judgment when making application of HKSAs principles and only accept departure in exceptional instances but the aim should be to achieve objective of the engagement ethically (Gul 2007). Point to note is that, in some cases where auditors fail to comply with the HKSAs, and then such auditors are subjected to relevant committee under the HKICPA that upon hearings, the committee may recommend disciplinary actions for the auditor involved (Hong Kong Government News, 2011). In other gross cases, courts actions in conjunction with the HKSAs are adopted in ensuring the auditors involved in misconduct are punished.

Adequacy of Auditor’s Regulation System in Hong Kong

Prior to the formation of a formidable accounting and auditing body in Hong Kong, the overall auditing field was loosely regulated an aspect that made it difficult to control practitioners in the field. Nevertheless, with the formation of HKSA and the subsequent transformation of the body into HKICPA, it can be stated that regulation in the auditing field in Hong Kong has experienced some level of sanity, coordination, and proper planning. Today, HKICPA remains the supreme body in making sure that all practitioners comply with all statutory bodies’ governing auditing in the country (Hong Kong Institute of Certified Public Accountants, 2009). At the same time, the role of independent bodies like judiciary cannot be ignored since they have become legal custodians in ensuring regulatory measures with regard to auditing are obeyed by all stakeholders. In essence, it can be said that, Hong Kong’s auditing regulation system is largely intertwined with international auditing standards and the eventual result has been an evolution of an auditing regulatory regime in the country that has an international outlook (Lulu, 2011; International Monetary Fund, 2003).

Nevertheless, it has to be noted that the HKICPA regulation regime in Hong Kong is still young and this has seen some instances where the body has been forced to reluctantly surrender its powers to other bodies like Financial Reporting Council (Accountancy Asia, 2010). At the same time, lack of transparency in some instances has forced the government to require the body to have its key aspects of regulation subjected to independent oversight bodies (Accountancy Asia, 2010). This has led to presence of the independent oversight bodies in functions such as audit investigations, in practice review of the body’s activities and in disciplinary processes (Accountancy Asia, 2010). Moreover, the HKICPA still grapples with the issue of how well should the award audit practice certificates and register audit practices be formulated especially with Hong Kong auditors in mainland China (Yiu, 2011). Other key areas that have yet to receive adequate attention include the issue of unlimited liability of auditors and the overall imbalance of auditors versus other practitioners involved in preparing financial statements (Accountancy Asia, 2010). Therefore, the above-identified areas of weakness should be the basis upon which continuing cycle of improvement need to be adopted.

Conclusion

In conclusion, it can be stated that regulation of auditing field in Hong Kong remained unorganized for a long time until early 1970s when the first formal body to regulate practitioners was formed. With time, HSKA as a professional body evolved and revolutionalized the field of accounting and in particular that of auditing. This revolution was manifested through enactment of laws, regulations, and appropriate standards to guide members in the profession. As the needs, requirements and expectations of the public increased on the role and need for auditors to act as professional; there was need to transform HKSA into a bigger body that has structured organization systems. This resulted in the formation of HKICPA. Today, HKICPA has transformed the auditing field and placed it to the international level through adoption of international standards and practices. Nevertheless, inadequacies remain challenge to HKICPA as body, which makes auditing as a practice to experience some problems. However, through collaborative efforts of both stakeholders, these challenges should be the basis upon which all stakeholders need to build and create an auditing regulation environment that meets needs and desires of all stakeholders in Hong Kong.

Reference List

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Anonymous. 2011. “Standards, sustainability and ethics are key concerns for accountancy profession.” Accountancy Ireland, Vol. 43, No. 2, p.46.

Burkholder, S., 2011. “IAASB calls for ‘fundamental review’ of auditor reporting to better serve users.” Accounting Policy and Practice Report, Vol. 7 No. 11, p.403.

Graham, L., 2007. Accountants’ handbook: Special industries and special topics. NJ: John Wiley and Sons.

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Kiernander, G., N.d. Professional ethics in Auditing. Web.

Kwok, B. K., 2008. Financial analysis in Hong Kong: qualitative examination of financial statements for CEOs and board members. Beijing: Chinese University Press.

Liu, E., 2011. Two regulators too many for auditors? White collar. Hong Kong: South China Morning Post, p.2. Web.

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