In July, the Hong Kong Institute of CPAs issued revisions to the Code of Ethics for Professional Accountants (Code) to broaden the definition of a public interest entity (PIE). These revisions include more categories of entities as PIEs, given the heightened public interest in their financial condition, for the purposes of independence requirements to enhance confidence in their audits.
Key changes in the definition of PIEs
The expanded definition of a PIE in paragraph R400.22(b), (c), and (d) of Chapter A of the Code incorporates the mandatory PIE categories specified in the International Code of Ethics for Professional Accountants (including International Independence Standards). To implement this revised definition in the local context, the Institute’s Ethics Committee has introduced a locally developed paragraph 400.23 A3, which refines the PIE definition by considering the unique facts and circumstances of Hong Kong. These local modifications were the outcome of a rigorous process involving extensive consultation and thoughtful deliberation.
Categories of entities considered as PIEs
Entities that fall within the following categories will now be classified as PIEs under Chapter 4A, Part A of the Code:
- A publicly traded entity.
- An entity one of whose main functions is to take deposits from the public, being licensed banks defined under the Banking Ordinance except where there is no statutory requirement for audit to be performed.
- An entity one of whose main functions is to provide insurance to the public, being authorized insurers defined under the Insurance Ordinance except for (i) captive insurers; (ii) special purpose insurers; and (iii) insurers where there is no statutory requirement for audit to be performed.
- An entity specified as such by law, regulation or professional standards to meet the purpose described in paragraph 400.15. They include:
- Mandatory Provident Fund Schemes, as registered under the Mandatory Provident Fund Schemes Ordinance
- Occupational Retirement Schemes (ORSO schemes), as registered under the Occupational Retirement Schemes Ordinance and are exempted under section 5 of the Mandatory Provident Fund Schemes Ordinance with total assets exceeding HK$100 million by reference to the most recent set of audited financial statements.
Encouraging broader assessment
Paragraph 400.24 A1 also encourages firms to determine whether to treat other entities as PIEs for the purposes of Part 4A, Chapter A of the Code. Factors to consider include the entity’s importance within its sector and the potential systemic impact on the economy as a whole in the event of its financial failure as set in paragraphs 400.14 and 400.24 A1.
Furthermore, paragraph R400.25 introduces a transparency requirement for firms to publicly disclose the application of independence requirements for PIEs where they have done so. Correspondingly, the Institute has also made narrow scope amendments to Hong Kong Standard on Auditing (HKSA) 700 (Revised) Forming an Opinion and Reporting on Financial Statements and HKSA 260 (Revised) Communication with Those Charged with Governance as a result of Paragraph R400.25.
Implementation timeline
The revised definition of PIEs including the local refinements will be effective for audits and reviews of financial statements for periods beginning on or after 15 December 2024. Early adoption is permitted.
We encourage practitioners to thoroughly understand the PIE definition revisions through the Institute’s Final Pronouncement and the accompanying Basis for Conclusions. Additionally, a video clip and Frequently Asked Questions document have been released to enhance understanding and awareness of the revised definition. We also recommend all professional accountants to visit the Institute’s Resource Centre to the Code, which offers a wide range of technical resources related to ethics for professional accountants, helping you stay informed and compliant with the latest standards.
This article was contributed by Grace Lau, Associate Director of the Institute’s Standard Setting Department
