'Unacceptable': Hong Kong’s small auditors are cutting corners, threatening to undermine city’s finance hub status, says accounting watchdog
‘Their attitude in compromising audit quality either by impaired objectivity or by cutting corners is unacceptable,’ says regulator’s head of inspection
Edmund Wong, a lawmaker for the sector, said smaller players are often hampered by difficulties in recruiting the best talent
July 11, 2023
Hong Kong’s accounting watchdog has lashed out at the city’s also-ran auditors, accusing them of malpractices that could imperil the city’s status as a global financial sector.
Small and medium firms, typically those that audit fewer than 100 listed companies a year, have the “disappointing” tendency to cut corners and show the failure to “learn from past mistakes,” displaying an “unacceptable attitude” that “compromises audit quality,” according to Janey Lai, head of inspection at the Accounting and Financial Reporting Council (AFRC), citing an annual review of the industry’s work.
“There is huge room for improvement for these accounting firms,” Lai said during a press conference, without singling out any firm by name. “The recurrence of deficiencies from our annual inspection over the past three years indicated that some firms have not learned enough from our previous inspection findings.”
The AFRC’s harsh assessment of the industry, comprising more than 10,000 certified auditors, comes even as the city offered itself as the neutral ground in the years-long auditing dispute between the United States and China.
“Their attitude in compromising audit quality either by impaired objectivity or by cutting corners is unacceptable,” she said, adding that the audit quality of large firms is generally good. “This could have a severe impact on the public’s confidence in the quality of financial reporting of Hong Kong as an international financial centre.”
Her co-host at the event, Kelvin Wong Tin-yau, chairman of the AFRC, said if the small firms in question make no improvement in the coming years, the watchdog may refer them to the disciplinary committee for penalty actions.
Responding to the criticism, Edmund Wong, a lawmaker for the sector who also runs a small accounting firm in Hong Kong, said smaller players are hampered by difficulties in recruiting the best talent.
“The medium and small accounting firms also want to be auditors of big deals but they may not find it easy to get the talent needed for the more complex jobs,” Wong said.
“To solve the problem, the government should train more talent to help all accounting firms to have sufficient manpower to get the job done well. The small firms may also consider forming partnerships with other firms to improve their talent pools.”
Meanwhile, China’s Ministry of Finance (MOF) has agreed that in the future it will hand over documents needed for audit investigations to Hong Kong’s accounting regulator in a more timely fashion, according to Wong.
He said the regulator had met with mainland Chinese officials in April in Beijing, where they agreed to shorten the time it takes to pass on documents to the Hong Kong regulator in future.
“It took 11 months for the mainland regulators to pass the first batch of documents to us, because the mechanism was new and also because of Covid-19. We can expect the time for the transfer to be substantially shorter in future,” Wong said during Tuesday’s media event.
China’s broadly defined laws on state secrets extend to companies’ audit papers, and currently ban auditors from taking such documents out of the country for inspection by overseas regulators.
Based on an agreement signed in 2019, the MOF has assisted the council in its investigations, passing on a first batch of papers involving seven companies in December 2020 and a second batch in September 2022 relating to five companies.
Wong said the Hong Kong and mainland watchdogs will continue to work on cross-border cooperation in the investigation of alleged audit failures that include Hong Kong based accounting firms handling the accounting of mainland-based companies.
He declined to comment on the US audit regulator’s recent meeting in Hong Kong. The Post reported in March that executives of the Public Company Accounting Oversight Board (PCAOB) planned to visit the city to hold “preparatory meetings” with Deloitte and EY ahead of inspections later in the year as they sought to assess their auditing of Chinese companies listed in the US.
“I cannot comment on other regulators’ work but what I can say is any overseas regulator [is free to] do the regular inspection in Hong Kong of the auditors of overseas listed companies,” Wong said.
Under the United States Holding Foreign Companies Accountable Act (HCFAA) passed in December 2020, all US-listed foreign companies’ auditors need to comply with PCAOB inspection rules or face delisting after three consutive years of non-compliance. Some 168 mainland-based, US-listed companies faced possible delisting as a result.
However, a breakthrough came in August last year when an agreement was signed by the MOF, the Chinese Securities Regulatory Commission (CSRC) and the PCAOB for such inspections to be conducted in Hong Kong, with the first round conducted between September and November last year at PwC and KPMG offices in the city.
The American watchdog said in December it had been allowed to inspect the audit firms servicing the mainland companies listed in the US, removing the risk of delisting hanging over many of them at the time.
[South China Morning Post]
