Institute makes wide-ranging corporate governance recommendations
Earlier this month, the Hong Kong Institute of CPAs released its report covering the findings of an independent comparative study of corporate governance in Hong Kong, the United States, the United Kingdom, Mainland China and Singapore. Following the study, conducted by Syren Johnstone and Say H. Goo of the University of Hong Kong’s Asian Institute of International Financial Law, the Institute called for substantial improvements to enhance Hong Kong’s attractiveness to investors.
“Hong Kong has largely kept up with international developments over the past two decades. However, incremental and reactive changes are no longer enough for Hong Kong to stay ahead as a global player; we need significantly more,” said Wong Kim Man, Convenor of the Institute’s Corporate Governance Working Group. “The government must take the lead in instigating significant changes in some fundamental areas if Hong Kong is to stay ahead as a competitive and well-regulated international financial hub that balances the needs of business development and investor protection.”
The extensive recommendations in the report include the government establishing a corporate governance policy unit to lead and formulate relevant policies. “The global financial markets are very competitive, and market integrity is key to investor confidence which can be boosted by sharpening Hong Kong’s edge in corporate governance,” said Raphael Ding, the Institute’s Chief Executive and Registrar. “In practice, this means that we need new ideas and new measures to ensure that in the face of rapid market developments, our investor protection and governance models remain robust and effective.”
The report also recommends the strengthening of the role and responsibilities of independent non-executive directors (INEDs). The Institute recommends, among others, that the board’s corporate governance report include specific statements on how INEDs have discharged their role and responsibilities, and a code for non-executive directors to be developed by listed companies on a comply-or-explain basis to help investors assess the role companies expect them to fulfil.
It also highlights the need to bring more board actions into the enforcement regime of the Securities and Futures Ordinance. For example, the Institute recommends corporate governance disclosures stated in INED statements of their independence to be brought within the statutory regime governing the provision of false or misleading information to regulators.
The Institute is ready to work with other stakeholders to facilitate further progress in Hong Kong’s corporate governance development, says Ding.
Members can find the full report and recommendations here.
The Institute’s two Vice Presidents, Patrick Law and Johnson Kong, attended the Hong Kong Council of Social Service’s (HKCSS) NGO Directors’ Luncheons on 4 and 11 May with the Associate Director (Subventions) of the Social Welfare Department, Alex Wong Kwok-chun, HKCSS Vice-Chairperson Kennedy Liu and Kwok Lit-tung, members of Institute’s Community Service Working Group and around 80 board members and agency heads from 40 NGOs.
Organized by HKCSS, the Institute’s Charitable Fund sponsored these events to advocate to NGO board members the importance of good governance for achieving sustainable development. This project targets NGOs receiving the Hong Kong government’s Lump Sum Grant.
Pocket summary of HKFRS 17
The Institute has published this pocket summary of the new standard to provide insurers with a simple framework and general references when planning the implementation of HKFRS 17 Insurance Contracts. Check the New and Major Standards Resource Centre webpage of the Institute’s website for more information.
From left: Institute Chief Executive and Registrar Raphael Ding, Vice President Patrick Law, Deputy Director-General of Department of Accounting, Ministry of Finance Shao Min, and Institute President Eric Tong
Institute meets Ministry of Finance delegation
On 17 May, the Institute received a delegation led by Shao Min, Deputy Director- General of Department of Accounting, Ministry of Finance. The delegation met with the Institute and representatives of Hong Kong CPA firms, including Ministry of Finance-appointed advisors, to discuss the revisions to China’s Law on Certified Public Accountants (註冊會計師法) and Accounting Law (會計法). The Institute shared with the delegates the latest developments of the Hong Kong profession, including the new Qualification Programme, and audit regulatory reform.
Implementation stage of the new QP
The Institute’s new Qualification Programme (QP) will roll out stage-by-stage from June 2020 onwards and will see the introduction of new Student Information System for online registration and new study materials for exam preparation. The first examination session for the Associate Modules, the Professional Modules and the Capstone will be held in June 2020, December 2020 and June 2021 respectively. The Student Information System, which is currently being built and is based on the Oracle Campus Solution, will provide a one-stop automated platform for QP students to effectively manage their progress. More details can be found in the “New QP” section of the Institute’s website.
The minutes from the extraordinary general meeting held in March are now available. They can be found in the “Members’ area” of the Institute’s website.
Council minutes from the March Council meeting are now available. They can be found in the “Members’ area” of the Institute’s website.
Financial Controllership Programme
Last call for enrolment in the Financial Controllership Programme, the Institute’s specialist programme for future business leaders. The programme runs from mid-June to December. More details are available on the website.
HLB Hodgson Impey Cheng, Cheng Chung Ching, Raymond, CPA (practising) and Lai Tak Shing, Jonathan, CPA (practising)
Complaint: Failure or neglect to observe, maintain or otherwise apply professional standards issued by the Institute.
HLB was the auditor of Tiffit Securities (Hong Kong) Limited (now in liquidation), a corporation engaged in securities dealing under the Securities and Futures Ordinance (Cap. 571) and the preceding Securities Ordinance (Cap. 333). HLB issued compliance reports on Tiffit for the years ended 31 March 2003, 2004 and 2005 pursuant to the requirements of those ordinances. Cheng was the engagement partner for the 2003 reporting engagement. Lai was the engagement partner for the 2004 and 2005 reporting engagements.
In 2006, the Securities and Futures Commission discovered that Tiffit had misappropriated client assets. As a result of this finding, the commission referred the matter to the Institute, which set up an Investigation Committee under the Professional Accountants Ordinance (Cap. 50) (PAO) to investigate the respondents’ compliance-reporting on Tiffit for the three years. In November 2009, the Investigation Committee submitted its report to the Council of the Institute, noting that the respondents would have a case to answer.
The Investigation Committee’s findings and conclusions suggested that HLB’s underlying policies, internal controls and procedures were either inadequate in the circumstances or were inadequately enforced. In light of the above and findings set out in the report of the Investigation Committee, 12 complaints were submitted and lodged against the respondents under section 42C(1) of the PAO.
In 2010, the respondents sought to challenge the Institute’s decision rejecting the respondents’ complaints about the conduct of the Investigation Committee, including objections to the membership of the Investigation Committee and the Institute’s decision refusing to reconstitute a different Investigation Committee (HCAL 5/2010) by way of judicial review. After failing before the Court of First Instance and the Court of Appeal (CACV 192/2010), the respondents applied to the Court of Final Appeal. On 26 July 2013, the Court of Final Appeal handed down its judgment in favour of the Institute (FACV 8/2012).
Subsequently, HLB issued a writ (HCA 2107/2015, the Writ Action) against the Investigation Committee members personally, alleging that the Investigation Committee members were in breach of their duty to the respondents by “knowingly and/or maliciously submitting a false and/or inaccurate and/or negligently prepared Report.” The writ was never served on the Investigation Committee members but was sent by HLB’s solicitors to the Council. The Writ Action was subsequently discontinued.
Following a contested hearing, the Disciplinary Committee found that all 12 complaints were established against the respective respondents, in that the respondents failed to:
(a) Obtain sufficient knowledge and understanding of the factors, and plan and conduct adequate test work, in relation to anomalies in certain client accounts of Tiffit, and document matters which were important in providing evidence to support their opinion;
(b) Obtain sufficient appropriate evidence on which to base their opinion regarding Tiffit’s compliance with relevant statutory requirements pertaining to the handling of client money and securities, and document matters which were significant in providing evidence to support the unqualified opinions; and
(c) Obtain sufficient appropriate evidence on which to base their conclusion that adequate records in respect of securities held on behalf of clients were maintained by Tiffit under statutory requirements and document matters which were significant in providing evidence to support their conclusion.
Decisions and reasons: All three respondents were reprimanded. In addition, HLB, Cheng and Lai were ordered to pay penalties of HK$400,000, HK$300,000 and HK$300,000 respectively. Further, the respondents were ordered to pay jointly and severally HK$3,000,000 towards costs of the disciplinary proceedings.
The Investigation Committee was of the view that the respondents had failed to appreciate where and how they failed in meeting the professional standards in their work conducted for Tiffit and the negative implications on the profession as a whole.
In arriving at its decisions, the committee noted the Institute’s submissions regarding the respondents’ conduct in the course of the investigation including the late introduction of additional documents despite more than sufficient opportunity for the respondents to rely on them for years during the investigation period, and their highly obstructive behaviour in the course of the investigation. More specifically, they noted steps taken by the respondents included the issue of the Writ Action. These acts of the respondents were in the view of the committee unreasonable and unrespectful to the Council’s decisions on the investigation proceedings and unwarranted. Notwithstanding the above, the committee did not take these into account in deciding sanctions but took the respondents’ conduct into account in its decision on costs.
Lam Kin Choi, CPA (practising)
Complaint: Failure or neglect to observe, maintain or otherwise apply Hong Kong Standard on Quality Control 1; Hong Kong Standard on Auditing 500; and Hong Kong Standard on Assurance Engagements 3000.
Lam is the sole proprietor of William Lam & Co. (practice) and is responsible for the practice’s system of quality control and audit engagements. While carrying out a practice review, the reviewer found that the practice failed to implement an adequate system of quality control. In addition, a number of significant deficiencies were found in the practice’s audits and assurance engagements.
Lam appealed the Disciplinary Committee’s decision. On 6 April 2018, the Court of Appeal confirmed that Lam’s appeal against the Disciplinary Committee’s decision had been struck out on 13 February 2018.
Decisions and reasons: The practising certificate issued to Lam is to be cancelled and no practising certificate shall be issued to him for 12 months. In addition, Lam was ordered to pay a penalty of HK$20,000 and costs of disciplinary proceedings of HK$46,827. When making its decision, the Disciplinary Committee took into consideration the nature of the breaches and the conduct of Lam throughout the proceedings.
Lam Kwan, Anthony, CPA (practising) and Charles H. C. Cheung & CPA Limited
Complaint: Failure or neglect to observe, maintain or otherwise apply professional standards issued by the Institute.
Charles H. C. Cheung & CPA Limited expressed an unmodified audit opinion on the financial statements of a renovation project of a residential building covering a period from September 2005 to December 2009. Lam was the engagement director of the audit.
The complaint, made under section 34(1AAA) of the Professional Accountants Ordinance, was that the respondents failed to understand the scope of the audit engagement and plan the audit accordingly. They also failed to obtain sufficient evidence and adequately document audit procedures in relation to interest income, consultant fee paid and liquidated damages recoverable from contractors.
Decisions and reasons: The respondents were reprimanded and ordered to pay a penalty of HK$35,000 and costs of the disciplinary proceedings of HK$10,000. When making its decision, the Disciplinary Committee considered the parties’ submissions, Lam’s personal circumstances and the respondents’ conduct throughout the proceedings.
Lau Shiu Wai, Franklin, CPA (practising), Au Yeung Tin Wah, CPA (practising) and Lau & Au Yeung C.P.A. Limited
Complaint: Failure or neglect by Lau & Au Yeung C.P.A. Limited (corporate practice) to observe, maintain or otherwise apply Hong Kong Standard on Auditing (HKSA) 230 and HKSA 500. Failure or neglect by Lau to act diligently in accordance with section 100.5(c) as elaborated in section 130.1 of the Code of Ethics for Professional Accountants (COE). Failure or neglect by Au Yeung to act diligently in accordance with section 100.5(c) as elaborated in section 130.1 of the COE for failure to carry out an objective engagement quality control review under HKSA 220.
The corporate practice audited the financial statements of a Hong Kong listed company, China Environmental Resources Group Limited (company), for the years ended 30 June 2011 and 2012 (financial statements). Lau was the engagement director who issued the auditor’s reports on behalf of the corporate practice and Au Yeung was the engagement quality control reviewer.
The Institute received a referral from the Financial Reporting Council about auditing irregularities relating to the company’s financial statements regarding (i) re-measurement of contingent consideration in respect of acquiring the interest of a target group; (ii) loss per share calculation; (iii) recognition of intangible assets of the acquired target group; and (iv) evaluation of impairment assessment of patents and operating rights of the company.
Decisions and reasons: All respondents were reprimanded. The Disciplinary Committee further ordered Lau and Au Yeung, to each pay a penalty of HK$100,000 and the corporate practice to pay HK$180,000. The respondents were ordered to jointly pay costs and expenses of disciplinary proceedings of the Institute in the total sum of HK$154,567.90. When making its decision, the committee took into consideration the particulars of the breaches committed in this case, the respondents’ admission of the complaints, parties’ submissions and the respondents conduct throughout the proceedings.
Details of the disciplinary findings are available at the Institute’s website.