Hong Kong is moving to reform audit regulation making the current watchdog, the Financial Reporting Council, becoming independent from auditors and acquiring new powers to investigate audit firms.
In a document containing more than 250 pages, it was also proposed that Hong Kong’s FRC also has the power to impose penalties, including a maximum fine of $10m.
Legislation is expected to be proposed imminently.
James Lau, Hong Kong’s financial services and treasury secretary, said the move was “crucial” to underpin Hong Kong’s position as a financial stronghold.
“The bill will enhance the existing regulatory regime for auditors of listed entities, allowing it to be independent from the audit profession, thereby providing better protection to investors,” he said.
The Hong Kong Exchange has recently consulted on corporate governance for the special area’s listed companies.
The area is believed by many observers to have fallen behind international standards of auditor regulation since the Enron scandal.
The Hong Kong Institute of Certified Public Accountants (HKICPA) welcomed the proposals. Eric Tong, president of HKICPA, said: “HKICPA was an early advocate for an independent regulator of listed company auditors in Hong Kong, therefore we are keen to see the completion of this exercise. An independent regulatory body under the new regime will strengthen Hong Kong’s reputation as an international financial and capital market.”
However, HKICPA has reservations. It is concerned the maximum fine of $10m will be unfairly harsh on smaller audit firms, and believes the government should do more to justify the proposed annual budget for the FRC of $90m.
“Judging from our own experience in regulation, inspection and discipline, the figure seems very high considering the number of PIE (public interest entity) auditors under the purview of FRC. The Government needs to be more forthcoming and transparent with the funding parties, to ensure everybody is comfortable that their respective contribution is reasonable and fair.”