Code of Ethics – Practical Implementation issues in Mainland China and Hong Kong

Presented by : Albert AuHKICPA Representative to IFAC SMP Committee

Venue: Institute of Chartered Accountants Australia

16 September 2013

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Agenda

Opening remarks

Our limited internal consultation

Background - Accounting industry environment in Mainland China and Hong Kong

Implementation Issues in Mainland China

Implementation Issues in Hong Kong Accountants' perspective Regulators' perspective

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Opening remarks

A distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in the public interest

By guiding and regulating ethical behavior of accountants, the Code impacts every member of the profession whether in public practice or in business

Being an international standard setter, the work of IESBA is important and is taken very seriously by all stakeholders

The usability of the Code concerns both the effectiveness of the Code and relevance of IESBA

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Our limited internal consultation

Practical implementation issues in Mainland China

The Chinese Institute of Certified Public Accountants (CICPA)

Practical implementation issues in Hong Kong

Accountants' perspective HKICPA Ethics Committee (consists of firms, SMPs, PAIBs and regulators) HKICPA SMP Leadership Panel HKICPA PAIB Leadership Panel

Regulators' perspective HK Securities and Futures Commission (HKSFC) HK Financial Reporting Council (HKFRC) Hong Kong Exchanges and Clearing Limited (HKEx)

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Accounting industry environment -

Mainland China and Hong Kong

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Mainland China (excl. Hong Kong)

Accounting Industry Environment

Total number of CPAs Approx. 200,000

Practicing CPAs Approx. 100,000

Number of accounting firms 8,151

Economy

Total number of business units (subject to statutory audit)

3,500,000

GDP (2012) US$8.227 trillion (US$6,091 per capita)

Population 1.351 billion

Number of listed companies Approx. 2,490

Market capitalization of listed companies

US$3,467 billion

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Hong Kong

Accounting Industry Environment

Total number of CPAs 35,533

Practicing CPAs 4,141

Number of accounting firms 1,653

Economy

Total number of incorporated companies (subjected to statutory audit)

150,165

GDP (2012) US$263.3 billion(US$36,796 per capita)

Population 7.155 million

Number of listed companies 1,368

Market capitalization of listed companies US$2,670 billion

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Convergence of professional standards

Year of converging with IFAC standards

Mainland China Hong Kong

Auditing (IAASB ISA)

2007 2005

Ethics (IESBA Code)

2011 2005

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Implementation issues – Mainland China

(with input by CICPA)

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Challenges to understand and translate the Code accurately

Translating the Code accurately into different languages is fundamental to globally consistent adoption

There may be difficulties to fully understand certain topics in the Code due to language issues, for example: The ethical requirements of a network firm; Differentiating similar wording like: senior personnel,

senior level, seniority, senior individual, senior staff member, etc.

IESBA may consider to establish expert panel to support translation of the Code by non-English speaking jurisdictions

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Adaptation of standards in local context

Professional ethics concerns behavior and courses of action, thus requirements on ethical behavior may be closely related to local laws, regulatory environment and culture

As an emerging economy, the cultural and legal environments in Mainland China are different from those in the Western world. These differences need to be considered in the standard setting process

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Assistance to firms for effective implementation of the Code

Effective implementation of the IESBA Code relies on how the Code's requirements are translated by firms into in-house operational policies and procedures

The IESBA in cooperation with local standard setters may seek ways to assist firms in the translation process, especially for SMPs which generally possess limited resources. This can include developing a sample procedural manual for firms with case study examples for better illustration by practitioners.

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Additional guidance for group audit/cross border engagement

Firms are increasingly involved in cross border engagements, which involve compliance with more than one set of ethics standards and/or involve component auditors

The Code in the meantime does not contain much guidance on such circumstances

IESBA is recommended to develop additional guidance on such group audit scenarios, including situations when component auditors needs to comply with (i) IESBA Code and (ii) ethics standards issued by other jurisdictions

This concern is also applicable to Hong Kong

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Implementation issues in Hong Kong –

Accountants' perspective

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Understandability of the Code

Accountants (including firms of various sizes and PAIBs) generally consider that the length and the drafting style makes understanding the Code difficult

IESBA may consider to: Dissect the Code into standalone sets for: practicing

accountant and PAIB; PIE and non-PIEs Separate clearly between the requirements and guidance

- similar to the drafting convention of ISA Restructure the Code by topics - similar to International

Standards on Auditing (ISA)

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Understandability of the Code (Cont.)

IESBA may consider to: (Cont.) More diagrams and flowcharts for easier illustration Electronic version with search function – but flexibility is

required for adaptation by individual jurisdiction Separate those parts of the Code applicable/relevant to

SMO (IFAC member body) vis-à-vis actual professional accountants

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Additional guidance on materiality

The concept of materiality is widely used in the Code but the Code does not contain a definition and guidance to determine materiality

IESBA is recommended to develop additional guidance on determining what is materiality and how it is applied by professional accountants

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SMP concerns on application of safeguards that involve segregation of duties

In Hong Kong, 98% of business units are SMEs. Such SMEs provide 47% of job opportunities in Hong Kong (excluding civil service)

Companies incorporated in Hong Kong are subject to statutory annual audit

Most SMEs are served by SMPs

SMEs usually seek for "one-stop shop" for bookkeeping, taxation and audit services as a matter of business convenience

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SMP concerns on application of safeguards that involve segregation of duties (Cont.)

Example safeguards in relation to provision of non-assurance services to audit clients are typically segregation of duties in nature

Many SMPs have limited number of partners and employees

Many of them are even sole proprietors

This poses difficulties for them to implement safeguards which are related to segregation of duties

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SMP concerns on long association of senior personnel with an audit client

Para 290.150 states that familiarity and self-interest threats are created by using the same senior personnel on an audit engagement over a long period of time

Example of safeguards provided include: Rotating senior personnel off the audit team; Having a professional accountant who was not a member

of the audit team review the work of the senior personnel; Regular independent internal or external quality reviews

of the engagements

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SMP concerns on long association of senior personnel with an audit client (Cont.)

It is not uncommon for a partner in a SMP to serve a SME client for a long period of time, due to the experience and knowledge of the client's business and established business relationships. Management of a SME may also have similar expectations

Implementing the example safeguards are challenging for SMPs given their practices usually have few staff or even no other staff (i.e. sole proprietor)

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PAIBs concerns on review of Code's requirements

It is noted that IESBA is considering to review the ethical requirements specific to PAIBs (Part C of the Code)

It is noted that IESBA approved a project to review Part C of the Code. Phase I of the project will address:

pressure by superiors and others to engage in unethical or illegal acts

the responsibility of PAIBs to produce financial reports that are faithful representations of the economics of transactions and associated matters

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PAIBs concerns on review of Code's requirements (Cont.)

It is appreciated that it may not be possible for the Code to describe all of the circumstances and relationships that could be encountered by a PAIB that create or may create threats to compliance with the fundamental principles

A full rule-based regime may not be feasible or preferable

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Implementation issues in Hong Kong –

Regulators' perspective

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Drafting style and structure makes the Code difficult to comprehend Standard setters should first seek ways to improve the understandability

of the Code and make the requirements more visible

There may be too much reliance on internal threats-and-safeguards approach In some situations threats-and-safeguards approach may not be

appropriate (for example: Para 210.6~7 - competence requirement on engagement acceptance)

"Inform those charged with governance / audit committee" may not always be ideal safeguard because of conflict of interest

It is not easy to find things black and white and identify who is accountable and/or responsible

Involvement of other teams within the firm may not always mitigate threats as the other teams are likely subject to conflict of interest in other ways (for example: remuneration, career progression, etc.)

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Questions and Discussion