Transcript Final powerpoint (16 Sept 2013 to IESBA) (Revised)

Presented by : Albert Au
HKICPA Representative to IFAC SMP Committee
Venue:
Institute of Chartered Accountants Australia
16 September 2013
Code of Ethics –
Practical Implementation issues in
Mainland China and Hong Kong
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)
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
Accounting Industry Environment
Total number of CPAs
Approx. 200,000
Practicing CPAs
Approx. 100,000
Number of accounting firms
8,151
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Hong Kong
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
Accounting Industry Environment
Total number of CPAs
35,533
Practicing CPAs
4,141
Number of accounting firms
1,653
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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 nonassurance 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 threatsand-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
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