CPA Hong Kong Institute ofCertified Public Accountants香港會計師公會

12 April 2019

By email: reform@frc.org.hk

Private & Confidential

Financial Reporting Council 29th Floor, High Block Queensway Government Offices 66 Queensway Hong Kong

Dear Sirs

Sanctions Guidelines - Consultation Paper

The Institute welcomes the opportunity to comment on the draft sanctions guidance developed by the FRC. It was helpful to meet with FRC representatives on 25 March 2019 to better understand the reasoning behind and clarification of some of the proposals. We recognize that the FRC has made reference to sanctions guidance used by other Hong Kong and international regulators. The Institute used the same sources in developing its own proposals for sanctions guidance during the legislative process and supports guidance that is based on widely accepted and utilized regulatory and sanctioning principles.

However, as was expressed during the meeting on 25 March whilst understanding and accepting the general principles there remain some reservations about fully endorsing the proposals as the true effect will only be understood when they are applied in practice.

Comments and observations are shown below against specific questions as relevant.

1. Do you agree with the FRC’s objectives of imposing sanctions as set out in paragraph 10? If not, please state the particular objective(s) that you do not agree with and the reasons for your disagreement.

We agree with the objectives of imposing sanctions set out in paragraph 10. We also support the principle set out in paragraph 11 that the primary purpose of imposing sanctions for misconduct is not to punish but to protect the public and the wider public interest.

2. Do you agree with the FRC’s approach to determining sanctions summarised in paragraph 19? If not, please explain any alternatives you would propose and the reasons therefor.

We agree with the approach to determining sanctions summarized in paragraph 19. To address concerns that have been raised by some PIE auditors we suggest that it would be helpful for the guidance to clarify, and provide examples of, how or when sanctions based on a single example of misconduct may be applied to multiple parties i.e. the firm, engagement partner, QC partner and/or the person(s) responsible for the QC system of the firm.

37th Floor, Wu Chung House, Tel 電話：(852) 2287 7228213 Queen's Road East, Wanchai, Hong Kong Fax 傅真：(852) 2865 6776香港灣仔皇后大道東213號胡忠大廋三+七樓 (852) 2865 6603

Web 網址：www.hkicpa.org.hk E-mail 霉郵：hkicpa@hkicpa.org.hk

CPA Hong Kong Institute ofCertified Public Accountants香港會計師公會

3. Have we included the sorts of factors (paragraphs 21 to 24) in the Sanctions Guidelines that you would expect the FRC to consider in assessing the nature and seriousness of the misconduct and determining the sanctions to be imposed? Are there any other factors you believe the FRC should take into account when determining the sanctions to be imposed?

The factors set out in paragraphs 21 to 24 to be considered in assessing the nature and seriousness of misconduct and determining sanctions are comprehensive and do not appear to have any obvious omissions. However, a few questions have been raised:

• Would it be possible to indicate if weighting will be given to all or some of these factors?• Whilst it is understood that the FRC would not wish to commit to a strict "tariff based"

sanctioning approach, would it be possible to include a general indication of what sanctions would apply to less or more serious examples of misconduct, similar to paragraph 6.1 of the Guideline to Disciplinary Committee for Determining Disciplinary Order issued by the HKICPA?

• Paragraph 21(c) sets out financial benefit derived as a factor in assessing potential sanctions and makes reference to "profits gained or losses avoided". In our submissions on the legislation consultation we expressed our concern that profit is not an appropriate indicator of financial benefit in the context of audit as it may not be measured or calculated consistently from firm to firm.

• Paragraph 22(c) includes measures of financial benefit that are not relevant to auditors e.g. share options and performance related pay. We suggest these are not included in the guidance.

• Paragraph 22(d) identifies loss of significant sums of money as a factor and suggests quantification of such loss may make reference to reduction in market value or loss to creditors. We do not believe that these are appropriate points of reference as they may impute auditor liability that does not exist in law.

• Paragraph 22(o) includes the likely reoccurrence of misconduct as a factor in assessing seriousness. There has been a question asking how the FRC could be in a position to assess the likelihood of reoccurrence?

4. Do you agree that the sanctions, including a pecuniary penalty, to be imposed by the FRC should act as an effective deterrent and be proportionate to the misconduct and have regard to all the circumstances of the case, including the financial resources of the regulated persons? If not, what would you propose? Please explain your rationale.

We agree that pecuniary penalties should be used as a deterrent to misconduct and poor audit practice rather than as a punishment. We also agree that in line with general principles a pecuniary penalty should be proportionate to the misconduct and that the factors set out in paragraphs 37 and 38, subject to the comments below, would generally be relevant reference points to determine an appropriate amount of the penalty.

2

CPA Hong Kong Institute ofCertified Public Accountants香港會計師公會

There have been concerns raised about the size of financial resources and general financial strength of an auditor being used in determining the amount of a pecuniary penalty (paragraph 38(c)). There is an implication that larger firms will automatically receive larger pecuniary penalties than smaller firms for the same misconduct. It is also questionable whether "whole practice" financial circumstances are appropriate as the audit part of a firm may not be the main revenue generating unit. (Please also note our comments below on Q5.)

5. Do you agree with the factors set out in paragraphs 37 to 43 that the FRC will normally take into consideration when determining the amount of a pecuniary penalty? If not, please explain any alternatives you would propose and the reasons therefor.

We believe that the factors set out in paragraphs 37 to 43 to normally be taken into consideration in determining the amount of a pecuniary penalty are generally appropriate. However, paragraph 39 refers to "revenue generated by the PIE auditor". We believe that if this refers to total revenue of the whole practice it is too broad and could be better expressed by referring explicitly to revenue from the audit that gave rise to the misconduct.

We also feel that market share or number of non-audit clients (paragraph 40) are not appropriate factors to use in determining a pecuniary penalty as they are external to the audit practice of the PIE auditor.

Paragraph 57 suggests, but is not explicit, that admission and cooperation will be considered as mitigating factors in determining a sanction. We suggest that it is made clear that reasonable defence of a charge of misconduct using experts and legal advisors will not be considered uncooperative and therefore an aggravating factor.

6. Do you have any other comments on the Sanctions Guidelines that would help the FRC as an independent auditor regulator to protect the investing public and the public interest?

Paragraph 44 refers to insurance indemnifying auditors for pecuniary penalties not being a reason to increase penalties above the level that would otherwise be determined. Although this is a good statement to hear we believe that this is understood as a matter of principle and may not need to be re-stated in the guidance.

If I can be of any further assistance please contact me at ch「is@hkicpa_o「q_hk or on 2287 7372.

Yours faithfully

Executive Director

3