Hong Kong’s 25 largest accounting firms 2012

Will the new Companies Ordinance improve Hong Kong’s score?

A joint study by CLSA Asia-Pacific Markets and Asian Corporate Governance Association has revealed that cracks in corporate governance have become more obvious elsewhere in the region with most corporate scores either falling or rising marginally this yea compared to 2010 results. Hong Kong is no exception, which saw its score barely rising by one percentage point (ppt) to 66 points. Singapore edged out Hong Kong after scores improved by 2 ppts to 69.

Fair share of scandals

According to ACGA secretary-general Jamie Allen, both Singapore and Hong Kong have had their share of scandals, frauds, and conflicted IPO processes and both lack world-class systems of corporate governance. Singapore however outscored Hong Kong because the former’s government has been focusing greater attention on corporate governance reforms in the past two years. “Singapore has improved regulations and regulatory enforcement. Retail investor engagement is also growing. It also sets the benchmark for the independent regulation of auditors,” he said.

Hong Kong, he adds, continues to outflank Singapore in regulatory enforcement and has also improved some rules and regulations but it still has no sign of any clear government strategy on corporate governance. “Influence remains excessive and there there is no properly independent audit regulator,” he said.

According to this year’s report, the main issue in Hong Kong is audit regulation and audit quality. Hong Kong’s audit quality is said to have deteriorated to 75% in 2012 from 85% in 2010.

Government actions

Davis Polk & Wardwell (DPW) notes that in recent years there have been considerable developments in corporate governance standards applicable to companies listed on the Hong Kong Stock Exchange (HKEX) and it has now adopted its extensive proposed changes to the corporate governance code and listing rules, most of which took effect in early 2012.

One of the key changes to the Listing Rules – the requirement that independent non-executive directors (INEDs) comprise one-third of a listed company’s board – will take effect on 31 December 2012, and the new rule requiring a mandatory 15 hours of professional training in each financial year for company secretaries will take effect on a staggered basis according to the date of appointment of an individual as company secretary.

A significant number of the revisions are directed at the main actors in the implementation of corporate governance – the directors and the company secretary – and the constitution and responsibilities of various committees of the board. In respect of directors, DPW said that the revisions generally are designed to heighten the level of active participation required from directors such that mere attendance at board meetings is not sufficient.

Last July, the Legislative Council also marked a significant milestone in improving corporate governance when it finally passed into law the revised Companies ordinance. It will come into effect in 2014, and one of the key changes is that there is now a criminal liability on auditors of Hong Kong-incorporated companies if the auditors fail to declare in their audit reports the existence of certain accounting discrepancies or the inability to obtain all information and explanations necessary for the preparation of the audit.

Auditors’ oppositions

The revised law was generally accepted by the Hong Kong public except the auditors. The Hong Kong Institute of CPAs has lobbied against clause 399 which introduced criminal offences on auditors.

Winnie C. W. Cheung, chief executive and registrar of the Institute, said, “The consequence and harm done for the profession and Hong Kong will be huge if the clause is passed. Clause 399 will unduly lower the barriers to prosecution and bring great risks to good people in the profession. Talented young members of the profession will seek other career options with fewer risks and the quality of the profession will suffer.

The Institute’s position is to remove the clause altogether. It has also proposed a way to reduce the damage and alleviate the uncertainty the clause creates. It asked to change the prosecution threshold from “knowingly or recklessly” omitting a required statement from the audit report to making such an omission “dishonestly or with intent to defraud.” The proposed amendments intended to reinforce ACRA’s monitoring of firmwide quality controls and policies will enhance audit quality.