Institute holds two members’ forum on regulatory regime reform proposals
On 8 June, Christopher Hui, the Secretary for Financial Services and the Treasury, published a blog post titled “Further reform of regulatory regime of accounting profession” on the Financial Services and the Treasury Bureau’s (FSTB) website. The proposals will see the Financial Reporting Council’s (FRC) investigation and disciplinary powers expanded to cover all CPAs and practice units, and its inspection power to cover all practice units. The registration of practice units and public interest entity auditors, and the issuance of practising certificates will also be vested with the FRC.
The amendment bill will be introduced to the Legislative Council within this legislative year and the government aims to pass it and the subsidiary legislation required to enable the changes by June 2022. The government intends for the reforms to be effective from Q3 2022.
On 28 June, the Institute held a virtual Members’ Forum where representatives from the FSTB went through the proposals and answered questions on the reforms. A recording of the forum will be available soon.
The Institute will hold a second forum, featuring representatives of the FRC discussing how they plan to regulate the profession, on 6 July. Register now.
For details on the Institute’s views on the proposals as well as updates from the Council’s meeting with the Secretary for Financial Services and the Treasury, and his team from the FSTB, please refer to the email sent to members on 21 June.
CPA Virtual Run 2021 – highlights out now
Photos from the CPA Virtual Run 2021 are now available on the Institute’s website, including shots of the prize presentation ceremony and CPA runners in action. Read the stories of some of the runners who took part in this year’s race here.
Minutes of Council meetings
The abridged minutes from the April and May Council meetings are now available for members to read. They can be found on the “Members’ Areas” of the Institute’s website.
Resolutions by agreement
Chan Chi Kwong, Dickson CPA (practising) and CF Partners Limited
Complaint: Failure or neglect to observe, maintain or otherwise apply the fundamental principle of professional competence and due care in sections 110.1 A1(c) and R113.1 of the Code of Ethics for Professional Accountants.
The respondents issued an accountant’s report for a solicitors’ firm under the Accountant’s Report Rules. In conducting the reporting engagement, the respondents failed to comply with the Accountant’s Report Rules and the Institute’s Practice Note 840 (Revised) Reporting on Solicitors’ Accounts under the Solicitors’ Accounts Rules and the Accountant’s Report Rules. They did not perform adequate procedures to identify (i) overdrawing of client money from client bank accounts by the firm; and (ii) drawing of money from client bank accounts by the firm for disbursements not yet expended. Furthermore, they did not adequately perform checks to identify an overpayment into the client bank accounts by the firm.
Regulatory action: In lieu of further proceedings, the Council concluded the following should resolve the complaint:
1. The respondents acknowledge the facts of the case and the areas of non-compliance with professional standards;
2. The respondents be reprimanded; and
3. The respondents jointly pay an administrative penalty of HK$15,000 and costs of the Institute of HK$15,000.
Cheng & Cheng Limited
Complaint: Failure or neglect to observe, maintain or otherwise apply Hong Kong Standard on Auditing (HKSA) 500 Audit Evidence, HKSA 550 Related Parties, HKSA560 Subsequent Events and the fundamental principle of professional competence and due care in sections 100.5(c) and 130 of the Code of Ethics for Professional Accountants.
Cheng & Cheng audited the financial statements of a private company for the years ended 30 June 2015 and 30 June 2016. The engagement director of the audits ceased to be a member of the Institute in 2020.
For the 2015 financial year, Cheng & Cheng issued an unmodified auditor’s report on the financial statements initially prepared by the company. These financial statements were later replaced by a revised set of financial statements, on which Cheng & Cheng issued a modified auditor’s report. In conducting the audit procedures supporting the auditor’s report on the initial financial statements, Cheng & Cheng failed to obtain sufficient evidence to support the accounting treatment of a revenue item, and to properly enquire about the existence of significant related party transactions. In addition, in reporting on the revised financial statements, Cheng & Cheng failed to draw attention to the changes made to the financial statements and to the initial auditor’s report issued.
For the 2016 financial year, a wrong set of the company’s financial statements were initially printed, and Cheng & Cheng carelessly allowed them to be issued with the practice’s unmodified auditor’s report attached. After discovery of the mistake shortly afterwards, a set of correct financial statements with attachment of a modified auditor’s report of Cheng & Cheng was issued in replacement of the initial financial statements.
For both of the years, Cheng & Cheng failed to take appropriate action to prevent reliance on the initial auditor’s report that had been replaced, when management had not acted adequately to this effect.
Regulatory action: In lieu of further proceedings, the Council concluded the following should resolve the complaint:
1. Cheng & Cheng acknowledge the facts of the case and the areas of non-compliance with professional standards;
2. Cheng & Cheng be reprimanded; and
3. Cheng & Cheng pay an administrative penalty of HK$50,000 and costs of the Institute of HK$15,000.
Edmund Siu CPA (practising), Yip Kai Yin CPA and Elite Partners CPA Limited
Complaint: Failure or neglect by Siu and Elite to observe, maintain or otherwise apply HKSA 230 Audit Documentation, HKSA 500 Audit Evidence and HKSA 540 Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures. Failure or neglect by Yip to observe, maintain or otherwise apply HKSA 220 Quality Control for an Audit of Financial Statements.
Elite audited the consolidated financial statements of China National Culture Group Limited (formerly known as China Railsmedia Corporation Limited), a Hong Kong listed company, and its subsidiaries for the year ended 31 March 2014. Siu was the engagement director and Yip was the engagement quality control reviewer (EQCR).
The Institute received a referral from the Financial Reporting Council (FRC) about deficiencies in the audit. The financial statements included goodwill arising from the group’s acquisition in 2012 of a business that engaged in the development and operation of a mobile phone application for restaurant reservations. The application was under development and had not been launched as at 31 March 2014.
In assessing impairment of the goodwill, the respondents placed reliance on a cash flow forecast of the acquired business prepared by management. In doing so, they failed to obtain sufficient appropriate evidence to support the estimated number of subscribers to the application and subscription price adopted in the forecast. The respondents also failed to prepare sufficient audit documentation on the expected launch date of the application, and their evaluation of the continued validity of the group’s agreement with a third party for marketing the application.
Regulatory action: In lieu of further proceedings, the Council concluded the following should resolve the complaint:
1. The respondents acknowledge the facts of the case and the areas of non-compliance with professional standards;
2. The respondents be reprimanded; and
3. Each of Siu, Yip and Elite pay an administrative penalty of HK$50,000 to the Institute, and they jointly pay the costs of the Institute and the FRC totalling HK$289,594.80.
Tsoi Yuen Hoi CPA (practising)
Complaint: Failure or neglect to observe, maintain or otherwise apply HKSA 315 Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and its Environment and HKSA 500 Audit Evidence.
Tsoi audited the financial statements of a private company for the year ended 31 March 2019. He failed to prepare adequate audit documentation of his understanding of the nature of the company’s business. In addition, Tsoi failed to obtain sufficient appropriate audit evidence to support that revenue from sales of goods was correctly recorded in accordance with the criteria for recognizing sales, and that purchases included in the financial statements did occur.
Regulatory action: In lieu of further proceedings, the Council concluded the following should resolve the complaint:
1. Tsoi acknowledge the facts of the case and areas of non-compliance with professional standards;
2. Tsoi be reprimanded; and
3. Tsoi pay an administrative penalty of HK$20,000 and costs of the Institute of HK$15,000.
Disciplinary findings
KPMG, Fung Kwong Ming CPA, Wong Sau Ling CPA and Tse Hau Yin, Aloysius CPA
Complaint: Failure or neglect to observe, maintain or otherwise apply Statement of Auditing Standards (SAS)100 Objective and General Principles Governing an Audit of Financial Statements, SAS 230 Audit Documentation, SAS 300 Audit Risk Assessments and Accounting and Internal Control Systems, SAS 400 Audit Evidence, SAS 440 Representations by Management and SAS 460 Related Parties.
KPMG was the auditor of Moulin International Holdings Limited (subsequently known as Moulin Global Eyecare Holdings Limited) for the three years ended 31 March 1999, 2000 and 2001. It expressed unqualified audit opinions on the financial statements of the company and its subsidiaries (collectively group) for those years. Fung was the engagement partner in the 1999 audit and Wong was the engagement partner in the 2000 and 2001 audits. Tse was the concurring review partner in the audits for the three years.
In 2005, trading of the group’s shares on the Hong Kong stock exchange were suspended and provisional liquidators were appointed for the company after it defaulted on repayment of its bank loans. The liquidators uncovered apparent accounting irregularities and certain senior personnel of the company were arrested. Having considered the available information, the Council of the Institute then directed an investigation under the Professional Accountants Ordinance (PAO) be conducted into the audit of the group’s financial statements for the year ended 31 December 2003, which was conducted by another auditor.
In 2008, the Council considered information revealed in the liquidators’ legal actions and expanded the scope of the investigation to cover, among other things, the audits of the group’s financial statements for the years ended
31 March 1999 to 2001 conducted by KPMG. An Investigation Committee was subsequently formed. Investigation of the auditor engaged during the years that led up to the aforementioned loan default was delayed as a result of audit staff departure and seizure of certain audit working papers by the authorities. This impacted the progress of the investigation of KPMG.
In March 2018, the Investigation Committee issued a report and found that the respondents failed to have proper regards for the technical and professional standards expected of them in the audits for the three years. There were deficiencies in the audit procedures performed on prepayment of subcontracting charges, trade receivables, other receivables and PRC tax exposures. On the basis of the findings set out in the Investigation Committee’s report, a complaint was lodged against the respondents under section 42C(1) of the PAO.
Decisions and reasons: The respondents were reprimanded. In addition, the Disciplinary Committee ordered KPMG, Fung, Wong and Tse to pay penalties of HK$400,000, HK$100,000, HK$150,000 and HK$50,000 respectively. Furthermore, the respondents were ordered to jointly pay costs of disciplinary proceedings in the sum of HK$215,672. When making its decision, the committee considered the particulars in support of the complaint, the respondents’ personal circumstances and the parties’ conduct throughout the proceedings.
Hsu Yuk King, Mercedes CPA (practising) and Kwong Kam Kwan, Alex CPA (practising)
Complaint: Failure or neglect by Hsu to observe, maintain or otherwise apply HKSA 500 Audit Evidence and HKSA 230 Audit Documentation. Failure or neglect by Kwong to observe, maintain or otherwise apply HKSA 220 Quality Control for an Audit of Financial Statements.
Hsu was the engagement director, and Kwong was the EQCR, in an audit carried out by Andes Glacier CPA Limited on the consolidated financial statements of a Hong Kong listed company and its subsidiaries for the year ended 31 March 2017. The audit was selected for review in 2018 as part of the Institute’s practice review.
The practice reviewer identified significant deficiencies in the audit procedures carried out under Hsu’s charge on impairment assessment of cash-generating units and the associated goodwill, valuation of biological assets, accounting treatment of the issuing costs and effective interest of certain bonds, and distribution expenses. Kwong failed to perform an effective engagement quality control review to evaluate the significant judgements made and conclusions reached by the audit team in the above audit areas. In addition, certain working papers shown to the reviewer during the practice review were not included in the originally assembled audit files.
Decisions and reasons: The Disciplinary Committee reprimanded the respondents. In addition, the committee ordered Hsu and Kwong to pay a penalty of HK$150,000 and HK$80,000 respectively. The committee further ordered Hsu and Kwong to pay costs of disciplinary proceedings of HK$63,141 and HK$32,715 respectively. When making its decision, the committee took into consideration the particulars of the breaches committed in this case and the respondents’ early admission of the complaint.
Ng Ka Hong CPA (practising)
Complaint: Failure or neglect to observe, maintain or otherwise apply HKSA 220 Quality Control for an Audit of Financial Statements.
Ng was the EQCR for a corporate practice’s audit of the consolidated financial statements of China E-Learning Group Limited (currently known as China E-Information Technology Group Limited), a Hong Kong listed company, and its subsidiaries (collectively group) for the year ended 31 December 2014. The corporate practice, which has now been de-registered, expressed an unmodified auditor’s opinion on the consolidated financial statements of the group and on the company’s balance sheet.
The Institute received a referral from the FRC about deficiencies in the audit. The audit team failed to obtain sufficient audit evidence to support that there was no impairment of significant amounts due by certain subsidiaries included in the company’s balance sheet. In addition, the audit team failed to perform proper audit procedures in respect of two convertible bonds issued by the group during the year to settle certain existing liabilities. As EQCR, Ng failed to adequately evaluate the audit team’s judgements and conclusions reached in those areas.
Decisions and reasons: The Disciplinary Committee reprimanded Ng. In addition, Ng was ordered to pay a penalty of HK$150,000 and costs of the Institute and the FRC totalling HK$100,222. When making its decision, the committee took into account the impact of Ng’s audit deficiencies on the reputation of the profession, the fact that Ng committed similar deficiencies in case after case, and the public interest involved.
Details of the resolutions by agreement and disciplinary findings are available at the Institute’s website.
