Hong Kong to tighten scrutiny of company auditors

Auditors are to come under greater scrutiny in Hong Kong, where the regulator is poised to gain new powers to impose penalties after a series of corporate governance failings.

Legislation has been proposed to give the Financial Reporting Council, Hong Kong’s audit watchdog, independence from auditors in order to safeguard investor interests, the government said on Friday.

The bill, which will be presented to lawmakers next week, would make the FRC an independent body, rather than industry-regulated, that would be responsible for inspecting, investigating and disciplining auditors of companies listed in Hong Kong.

“The bill will enhance the existing regulatory regime for auditors of listed entities, allowing it to be independent from the audit profession, thereby providing better protection to investors,” said James Lau, the secretary for financial services and the Treasury.

“This is crucial to strengthening Hong Kong’s status as an international financial centre and capital market.”

The proposal comes amid an intensifying focus on auditing practices globally, particularly on the “big four” — PwC, KPMG, EY and Deloitte.

The UK’s accounting watchdog said at the end of last year that it plans to increase the level of fines that it can issue to crack down on poor practices in the sector.

Global auditors have come under the spotlight recently after becoming embroiled in high-profile corporate scandals.

KPMG’s connection to South Africa’s contentious Gupta family has resulted in a number of clients dropping the auditor, while the country’s corporate registry has accused the auditor, among others, of criminal breaches.

South Africa’s watchdog has also launched an investigation into Deloitte and its audit of retailer Steinhoff International after accounting irregularities were uncovered.

The push to empower Hong Kong’s auditing watchdog as an independent body will make it eligible to join the International Forum of Independent Audit Regulators, which Mr Lau said is “an important forum for international co-operation on the regulation of auditors”.

Dr John Poon, chairman of the FRC, said: “The introduction of this legislation is in the best interest of the investing public.”

He said this “much awaited reform” will bring Hong Kong’s auditor regulatory regime into line with other major capital markets worldwide, including New York and London.

The bill comes after a number of small, Hong Kong-listed companies saw their stock prices plunge last year by more than 90 per cent in some cases, wiping out $6bn in market capitalisation in one day.

The companies involved belong to the “Enigma” network of businesses that have crossholdings in each other, raising questions over corporate governance and transparency.

The Hong Kong government conducted a three-month consultation with the public in 2014, soliciting views on the proposal for independent oversight of auditors. It said the “overwhelming majority of respondents” were supportive of the plan.

Additional reporting by Hudson Lockett