Introduction

In Registrar of Hong Kong Institute of Certified Public Accountants v Wong & Anor, the accountants appealed a disciplinary committee's decision the substance of which was that they had failed to observe a professional standard in connection with an audited company's compliance with Hong Kong Accounting Standard (HKAS) 39 (Financial Instruments: Recognition and Measurement) in respect of an available-for-sale financial asset, before issuing an unqualified audit opinion. That appeal failed. More recently, the accountants' final appeal to the Court of Final Appeal (CFA) was also dismissed.(1) In particular, the CFA declined to import a standard of reasonableness in the context of a complaint, pursuant to Section 34(1)(a)(vi) of the Professional Accountants Ordinance (Cap 50), that an auditor had "failed or neglected to observe, maintain or otherwise apply a professional standard".

Background

For the background to the disciplinary proceedings and the appeal to the Court of Appeal, please see "Civil appeals of accountants' disciplinary proceedings".

The appeal before the CFA raised the following principal issues:

  • On the true construction of HKAS 39, must an impairment adjustment be made once there has been a significant or prolonged decline in the fair value of an available-for-sale asset, even though the accountants considered that decline to be temporary?
  • If so, do auditors who wrongly interpret or apply a professional standard in discharging their function as auditors necessarily commit a breach of Section 34(1)(a)(vi) of the Professional Accountants Ordinance?
  • Is it possible to import a standard of reasonableness or other similar considerations in assessing whether an auditor has "failed or neglected to observe, maintain or otherwise apply a professional standard" when considering a complaint pursuant to Section 34(1)(a)(vi)?

Decision

With respect to the first issue, the CFA held that on a true construction of HKAS 39 an impairment adjustment must be made in respect of an available-for-sale financial asset consisting of an equity instrument once there had been a significant or prolonged decline in its fair value, regardless of whether that decline was considered to be temporary.

Having answered this issue in the affirmative (otherwise there would have been no basis for the disciplinary finding against the accountants) attention turned to the construction of Section 34(1)(a)(vi) of the ordinance.

The two issues concerning the construction of Section 34(1)(a)(vi) essentially raised the same point for determination. Namely, given the failure to apply a professional standard, should Section 34(1)(a)(vi) be construed as incorporating a standard of reasonableness capable of exonerating the accountants notwithstanding their default in observing the professional standard.

As a matter of statutory construction, the CFA held that there was no basis to read into Section 34(1)(a)(vi) any standard of reasonableness. The CFA, in particular, noted that Section 34(1)(a) set out categories of complaints against a certified public accountant that fell into three types. First, there was a range of complaints at the serious end of the spectrum (eg, involving a conviction for a criminal offence). Second, there were complaints which involved infringement of professional standards or duties. Third, there were complaints to do with breaches while being a director of a corporate practice.

The present complaint clearly fell within the second category. Within this second category a range of complaints also existed. For example, some complaints within this category required negligence to be established. Others required that professional misconduct or dishonourable conduct be established or that the accountant be shown to have failed or neglected to comply with specific directions or requirements some being expressly excusable on reasonable grounds.

The CFA considered that it was natural to read a complaint that an accountant had failed or neglected to observe a professional standard (pursuant to Section 34(1)(a)(vi)) as being a complaint at the least serious end of the spectrum – the aim of which was not to punish but to enforce the application of a professional standard in the interests of a uniform practice without implying any fault.(2) Notably, unlike some other paragraphs of Section 34(1)(a), Section 34(1)(a)(vi) did not provide for any standard of reasonableness which the legislature could have done by incorporating the words "without reasonable excuse".

The CFA also rejected the notion that any of the provisions in HKAS 39 or Hong Kong Standard on Auditing 700 had any relevance to the issues concerning the construction of Section 34(1)(a)(vi).(3)

As a consequence, the accountants' appeal was dismissed.

Comment

The proceedings are interesting because they made their way to the Court of Appeal and the CFA, even though the disciplinary committee itself considered that there were good reasons for taking a lenient approach resulting in a penalty of HK$10,000 for each respondent and a direction that there be no publicity of the sanction without the consent of the accountants. Indeed, the CFA referred to the sanction as a "token" one.

The disciplinary proceedings involved the application of highly technical standards in respect of which the accountants appear to have had a genuine difference of opinion with the governing body's disciplinary committee. The accountants will have incurred substantial legal costs in their appeals against the disciplinary proceedings so it is legitimate to query whether court proceedings are the best way, and who should have to pay, to resolve disputes of such nature.(4)

In light of the recent tabling of a legislative bill granting powers of regulation over auditors of listed companies to the Financial Reporting Council (FRC), it will be interesting to see the extent to which the FRC provides guidance, remedial measures and (where appropriate) education and training for less serious regulatory matters involving the application of highly technical professional standards. Interestingly, the Hong Kong Institute of Certified Public Accountants has published on its website a Guideline to Disciplinary Committee for Determining Disciplinary Orders, to give guidance on deciding on appropriate sanctions for breaches of its professional standards.(5)

For further information on this topic please contact David Kwok or David Smyth at RPC by telephone (+852 2216 7000) or email (david.kwok@rpc.com.hk or david.smyth@rpc.com.hk). The RPC website can be accessed at www.rpc.co.uk

Endnotes

(1) FACV 10/2017, (2017) 20 HKCFAR 556, December 22 2017.

(2) Supra note 1, at paragraph 83.

(3) Hong Kong Standard on Auditing 700 (Forming an Opinion and Reporting Financial Statements).

(4) See, for example, Registrar of Hong Kong Institute of Certified Public Accountants v X (No 3), CACV 244/2016, [2017] 5 HKLRD 568, where the Court of Appeal ordered costs to be paid to the accountants following their successful appeal.

(5) October 2017, available here.

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