It has been three years since Hong Kong's Financial Reporting Council (FRC) had its remit expanded to issue sanctions and reprimands, and discipline auditors of public listed entities (PLEs). Further reforms will come into effect on 1 October that will extend the Council's power of inspection, investigation and discipline to cover all auditors and professional accountants.
As well as expanded statutory functions, from 1 October the FRC will be renamed the Accounting and Financial Reporting Council (AFRC). In addition to its new moniker, the Council will oversee the Hong Kong Institute of Certified Public Accountants (HKICPA)'s performance in its various regulatory and statutory professional functions.
The suite of functions includes the issuance of practising certificates to certified public accountants, registration of accounting practice units and local public interest entities auditors, and the inspection, investigation and discipline of the accounting profession.
The AFRC will maintain close dialogue with the accounting profession to understand the opportunities and challenges the profession is facing
However, the Council will maintain the maximum penalty currently imposed – a fine of either HK$10m or three times the profit earned by the accountant and their firm – in case of audit failures involving listed companies. For accountants serving the private sector, the highest fine will also remain unchanged at HK$500,000.
According to AFRC chairman Kelvin Wong, the transformation of the FRC to the AFRC will further enhance the independence of the regulatory regime for the accounting profession in Hong Kong. In terms of its aims, he says in relation to independent regulation of the accounting profession, the reforms will bring Hong Kong more in line with the international practices of the city's major trading partners. Moreover, the reforms will eliminate the regulatory overlap for practice units that audit listed entities and non-listed entities, which are currently subject to regulation by the FRC and HKICPA respectively.
Opportunities ahead
As the independent regulator, the AFRC says it will maintain close dialogue with the accounting profession to understand the opportunities and challenges the profession is facing.
In terms of opportunities, the Council cites the upsurge of environmental, social and governance (ESG) reporting and assurance, the sustainable development of the profession, and opportunities emerging in the Greater Bay Area (GBA), which promotes closer cooperation and coordination between 11 cities of the Pearl River Delta, among which Hong Kong is designated to serve as one of the core engines.
Challenges include a shortage of talent and talent outflow, which has seen more than 113,000 residents leave Hong Kong in the 12 months to the end of June, according to government data.
The Council is not immune from experiencing its own talent turbulence. The turnover rate of the Council's accounting and legal professionals jumped by nearly nine percentage points year on year to 11% for the fiscal year of 2021. However, the Council says it is confident that it will successfully complete its plan to double its staff headcount from 56 to 115 by the end of this year.
Interestingly, the AFRC's expanded remit comes at a time when talks between Beijing and Washington to allow US inspectors to travel to Hong Kong to review US-listed mainland Chinese companies' audit documents are gathering steam.
The AFRC says that although the Council has a regulatory interest in the conduct of cross-border regulated entities, there would be no change in principle to the way in which the regulation of cross-border mainland-listed entities would be conducted.
As such, the Council will render all necessary assistance and make appropriate arrangements within its regulatory remit and powers as stipulated in the Financial Reporting Council Ordinance to support mutual cross-border collaboration.
