Self Regulation of AccountingSelf Regulation of Accounting

Presented by:

Stanley Wong 50185329

Anny Tang 50185631

Amanda Li 50184554

Sherona Hung 50121567

AC4304 Financial Reporting Theory

is not Satisfactoryis not Satisfactory

1. Background info of Self Regulation

2. HKSA

3. Conflict of Interest

4. Recommendations

5. Enron Case

AC4304 Financial Reporting Theory

Self Regulation of Accounting is not Satisfactory

Agenda

Background info of Self Regulation

Like other professions, accountancy bodies are self regulated since beginning

Membership admission, behavioral requirements, disciplinary penalties, etc are its essential elements

AC4304 Financial Reporting Theory

Background info of Self Regulation

In UK from 1980s, self-regulation is governed by professional bodies itself

e.g. Investment Business Regulations Insolvency Licensing Regulations Audit Regulations

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Transparency of HKSA

The Composition of HKSA’s Council12 = Professional Accountants

2 = Government appointed

Disciplinary Panel & Investigation Panel are appointed by the Council

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Transparency of HKSA

Investigation process of complains : secret

low transparency

public are difficult to monitor

Protecting Accountant’s benefits Among 80 complaints, only 12 approved

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Nature of HKSA

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Guidelines & Rules established in HKSA

The Empowerment of HKSA

Guidelines & rules established in HKSA

HK Statements of Professional Ethics : Based on old UK ethical rules Established when most accounting firms’ work

was auditing SFC Director of Accounting Policy,

During 90s accountants are required to perform more variable works than before

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Guidelines & rules established in HKSA

Current rules cannot fit in nowadays

accounting need

Only general guidelines, lack of detailed

descriptions

HKSA has the power to amend regulations

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The Empowerment of HKSA

Empowerment of HKSA is limited

Both guidelines & disciplinary actions

SSAP only serve as an guideline, no legally binding purpose

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The Empowerment of HKSA

Conduct disciplinary hearings Impose sanctions on its members Reprimand orders Penalties up to $500,000 Removal from its professional accountant

registry Empowerment is not enough

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Conflict of Interest

Issue of integrity Elements of ethical guideline for auditor,

including integrity & independency Give a true & fair view

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But in the real world, can the accounting firm

do their job independently?

Conflict of Interest

Many provide auditing service & consultant service to the client at the same time

Not easy to get a balance between Objectivity & Conflict of interest

Rely on the ‘Great Wall’

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Conflict of Interest

A research on accounting ethics, by Defining Issues Test (DIT)

Accountants’ moral development is not as advanced as other populations with similar levels of education, & that those with lower levels of moral reasoning are more likely to engage in dysfunctional behavior

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Conflict of Interest

There are many temptations

E.g. in Enron case, Enron gave Arthur

Anderson US$1m / week

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Conflict of Interest

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Moral Level of Accountant Conflicts of interest

How to regulate themselves

Recommendation – Establish law to govern the activities of accountant

Give an advice to their members The highest penalty is terminating its membership The warning is not harsh Establish law to govern the accountant is essential e.g. they should not provide audit work &

consultant service to the same client at same time

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Hold disciplinary hearings in public More non-accountants in the Disciplinary

Committee

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Recommendation –Alter the nature & power of HKSA

Expand HKSA’s power to obtain info from suspected accountants

Regularly review the transparency of self regulation

Construct a transparent, convincing monitoring system

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Recommendation –Alter the nature & power of HKSA

The work for Ethics Committee Develop self-regulation through teaching Develop self-regulation through exams Development of new standard & guidelines

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Recommendations

Development of new ethical guidance Updating of the HKSA's existing ethical

Statements & Guidelines Interpretations of ethical Statements &

Guidelines

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The Work for Ethics Committee

Develop self-regulation through teaching & examination

HK Polytechnic University,

‘Ethics in Accounting’

a mandatory course for 3rd yr students

QP examination => more ethics questions

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Development of new standard & guidelines

Development and publication of the joint publication Ethics in

Management - A Practical Guide for Professional Accountants

Revise the old code of ethic with IFAC s8

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Enron Case

Enron: Giant energy-trading firm

Sought Bankruptcy Protection

after announcing overstated profits

> US$0.5 billion over 4 years

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WHY ?

Enron Case

Arthur Andersen not doing as a good watch dog !!

The audit firm failed to regulate itself

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Enron Case

Problems : Conflict of interest

Many Enron top financial executives were former AA employees

Revenue from Enron to AA is very large

Non-transparent operation No formal commission or organisation

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Q

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A&

The

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End