I wrote last December about a discussion going on in Hong Kong about whether to toughen audit regulation to bring Hong Kong in line with global practices. Hong Kong had suffered the insult of losing regulatory equivalency with the EU in accountancy because of its weak regulatory regime. The Hong Kong Institute of CPAs (HKICPAs) led the debate, and based on comments most members seemed aghast at the concept of tough audit regulation. The HKICPAs concluded its consultation with members on January 17, 2014 and the debate went silent.
I hope the issue gets revived. Hong Kong practices self-regulation in account-ancy. That means the accounting firms regulate themselves. After Enron, the rest of the world pretty much concluded self-regulation does not work. It is not working in Hong Kong.
I offer as evidence the case of former EY senior partner Anthony Wu. Wu was found to have violated auditor independence rules because he was a member of the client’s executive committee, authorized signer on 13 client bank accounts, had significant personal dealings with client subsidiaries, loaned the client money, and had EY collect a retainer for his services as a financial advisor. The client, New China Hong Kong Group collapsed in 1999, spawning a series of claims. Eventually complaints were filed with the HKICPAs about Wu, another EY partner and EY itself. Auditor independence is fundamental to the accounting profession, so the allegations were serious.
It took the HKICPAs two years just to decide whether to investigate the com-plaints. That was understandable, in Hong Kong, anyway. Wu is a high profile CPA in Hong Kong. He was Chairman of EY from 2000 to 2005. He was awarded the Gold Bauhinia Star (Hong Kong’s highest honor), and served as Chairman of the Hospital Board, the Chamber of Commerce and served on several high profile government and corporate boards, and the China People’s Political Consultative Committee.
The investigation dragged on for another 2 ˝ years, and the case was finally heard by a HKICPAs disciplinary committee in May 2013, making it the longest running case in HKICPA history by a huge margin. HKICPAs issued the report of the investigative committee late on Christmas eve raising suspicions they were trying to bury the incident.
Curiously, while the disciplinary committee found that Wu, his partner, and EY had violated the independence rules, they did not administer any sanctions, Almost 6 months later, the HKICPAs' website still does not show any sanctions.
The HKICPAs has limited sanction power anyway. It can ban a CPA from practice, something that would probably no longer affect Wu but would be devastating to EY. It can fine each of them up to HK$500,000 (US$64,500) which is grossly inadequate for a violation of public trust of this nature. Or it can issue a rep-rimand, a verbal slap on the wrist. The violations are serious and Wu should receive the maximum penalty. And maybe that gold star ought to fade.
The disciplinary committee needs to step up and do its job. These are the res-ponsible members of the committee who have failed to act to issue sanctions for the past six months:
Kumar Ramanathan SC, Chairman
James Taylor Fulton
Dr. Lui Hon Kwong
Tony Chan Tung-Ngok
Most importantly, Hong Kong needs an independent audit regulator with suf-ficient funding to clean up the profession.