Transcript Self Regulation of Accounting is not Satisfactory

Self Regulation of Accounting
is not Satisfactory
Presented by:
Stanley Wong
Anny Tang
Amanda Li
Sherona Hung
AC4304 Financial Reporting Theory
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Self Regulation of Accounting is not Satisfactory
Agenda
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Background info of Self Regulation
HKSA
Conflict of Interest
Recommendations
Enron Case
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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
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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 Council
12 = 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
 Guidelines & Rules established in HKSA
 The Empowerment of HKSA
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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
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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
But in the real world, can the accounting firm
do their job independently?
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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
 Moral Level of Accountant 
 Conflicts of interest
How to regulate themselves
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Recommendation – Establish law to govern
the activities of accountant
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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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Recommendation –
Alter the nature & power of HKSA
 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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Recommendations
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The work for Ethics Committee
Develop self-regulation through teaching
Develop self-regulation through exams
Development of new standard & guidelines
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The Work for Ethics Committee
 Development of new ethical guidance
 Updating of the HKSA's existing ethical
Statements & Guidelines
 Interpretations of ethical Statements &
Guidelines
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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
WHY ?
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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