Ticking the boxes - Hong Kong accountants regulator highlights failings in professional training compliance

News

Ticking the boxes - Hong Kong accountants regulator highlights failings in professional training compliance

13 December 2023

The Accounting and Financial Reporting Council (AFRC) has published its 2023 Oversight Report on HKICPA's Performance of Specified Functions (the report). This is the first full year the AFRC has reported on the exercise of its expanded powers since being handed them in October 2022. The AFRC noted a high level of non-compliance in the reporting of continuing professional development training, a lack of consultation on anti-money laundering (AML) and counter terrorist financing (CTF) guidelines and a delay in updating professional ethics standards.

The AFRC, formerly the Financial Reporting Council (FRC), was established in 2006 as an independent regulatory body charged with overseeing possible auditing and reporting irregularities of auditors of listed entities. In 2022, the powers which had previously been exercised by the then self-regulating Hong Kong Institute of Certified Public Accountants (HKICPA) were transferred to the FRC which was renamed the AFRC on 1 October 2022.

These expanded functions included, amongst others, matters concerning the discipline, inspection and investigation of the accounting profession as well as setting continuing professional development (CPD) requirements for certified public accountants (CPAs). The AFRC also took on the responsibility of oversight of the HKICPA’s Guidelines on Anti-Money Laundering and Counter-Terrorism Financing for Professional Accountants.

The report, published in November 2023, summarises the key findings and recommendations arising from the AFRCs assessment during the period 1 April 2022 to 31 March 2023.¹

Training

The report noted a high non-compliance rate in CPAs making declarations relating to their compliance with relevant CPD requirements. The failure rate in the compliance audit carried out by the HKICPA from June 2022 to February 2023 tripled when compared with the previous audit covering the period December 2018 to November 2021. The report said that

"it is unacceptable if CPAs perceive it as a mere box-ticking exercise" and that "CPD compliance audits are essential to ensure that CPAs fulfill the prescribed requirements for continuing professional development".

In response the HKICPA said it considered that most of the audit failures arose as a result of a new requirement to produce all supporting documents for verifiable CPD activities undertaken in the past three years.

The report also found a lack of a robust handling and review mechanism of feedback received on CPD training, something which the HKICPA said it was already reviewing.

Examination

The report highlighted failings in quality control in the examination papers set for the qualification programme and the absence of a pre-defined baseline for acceptable performance by workshop facilitators. The HKICPA in response said it would enhance quality control arrangements for the examination and had approved a revised mechanism for approving the quality of workshop facilitation.

Referrals of CPAs with convictions or regulator sanctions imposed

The report noted that, since the transfer of responsibilities from the HKICPA to the AFRC concerning CPA misconduct, the HKICPA had not referred any CPAs who had reported convictions or sanctions by other regulators to the AFRC for consideration regarding possible regulatory action. The HKICPA responded by stressing the need for the sensitive handling of personal data and urged the introduction of a proper system including a formal request to enhance accountability for information transfer.

AML / CTF guidelines

The report complained that the HKICPA did not "formally consult" the AFRC in its capacity as a regulator of the accounting profession in relation to AML/CTF issues before issuing a draft consultation document on possible revisions to the public. The HKICPA said it would act on the recommendation to consult the AFRC and other stakeholders in future.

Professional ethics

The AFRC said that certain standards became outdated and inaccurate when the transfer of powers on 1 October 2022. It was "vital for the HKICPA to maintain accurate and up to date standards at all times for proper discharge of its statutory responsibilities". The HKICPA said that it had an established process for reviewing and updating its Members’ Handbook and that once the necessary changes were agreed by all parties, they were published "as a matter of priority".

Joining forces

Commenting on the report, Janey Lai, the Acting CEO of AFRC described the HKICPA as playing a "pivotal role" in continuously raising the standards of the accounting profession. She expressed confidence that the HKICPA would make progress "towards the overarching objective of propelling the sustainable development of the profession".

The report comes some months after a new Memorandum of Understanding (MoU) was entered into between the AFRC and the Hong Kong Monetary Authority with the aim of strengthening cooperation amongst regulators in August 2023.²The scope of the MoU was widened over that of a previous one and underlined the commitment of both parties to ensure the observance of proper standards by auditors.

That publication followed hot on the heels of the first joint statement issued by the AFRC and the Securities and Futures Commission (SFC). The statement addressed a jump in instances of suspected misconduct of listed issuers diverting funds to third parties under the pretext of supposed loans.³

The regulators' joint determination to stamp out misconduct in the financial sector was also demonstrated when in October 2023, the AFRC, SFC and ICAC carried out the first tripartite operation involving two Hong Kong listed companies, on suspicion that they had falsified corporate transactions in the value of HK$193 million.

Combating fraud, upholding standards – the AFRC seems determined to take its place amongst the regulators known to have sharpened its teeth in the financial services arena in Hong Kong.

Authored by Yolanda Lau and Nigel Sharman