ACCOUNTING OUTLOOK this year. Ernst & Young also expects to see more H-share IPO offerings in Hong Kong following the introduction of new supportive policies that allow medium to small privately-owned enterprises to list in Hong Kong’s H-share market. Ringo Choi, Asia-Pacific IPO Leader at Ernst & Young, agrees with Lo’s positive outlook for IPOs in 2013 as he notes that many new supportive policies - which were on hold amid leadership change – will start to take effect. They include economic initiatives that will be rolled out in the Mainland and expected to benefit companies in certain preferential sectors. “With expected reduced stock market volatility, supportive new economic policies, and better and brighter economic prospects, IPO activities in the latter half of 2013 is set to improve – suggesting that it could be the right time for companies currently in the pipeline to list next year,” he adds. More merging firms More Chinese accounting firms are looking to merge with Hong Kong firms in 2013, says Lo. SHINEWING is actually the first of its kind, a PRCbased firm that has integreated with a local company. Such integration will be a trend, notes Lo, and is powerful in creating synergy, in terms of deep indigenous knowledge, extensive network and strong manpower resources. A majority of listed companies in Hong Kong come from PRC. “Under integration, the PRCbased accounting firms could utilize their profound knowledge of the development of China’s capital market as well as the business practices of those PRC firms, while the Hong Kong-based accounting firms could make use of their familiarity with the listing requirements and procedures in Hong Kong,” says Lo. This way, both firms could establish a platform bridging between Chinese financial practices and international accounting standards, offering the genuine integration for clients in China, Hong Kong as well as overseas. Another pressing challenge that the industry will be facing in 2013 is dealing with regulations. As Andrew Ross, managing director at Baker Tilly Hong Kong puts it: “There are
only three key issues for the Hong Kong accounting industry in 2013: regulation, regulation, regulation.” Haunting regulations The first, but continuing issue is that of the US regulators, the SEC and the PCAOB, requesting information from Hong Kong audit firms about the audits of their PRC clients which are registered in the USA, notes Ross. He adds that the SEC, and more recently the SFC (HK’s equivalent of the SEC) has taken legal action against a number of audit firms to try to obtain the audit information and, subsequently, to charge the firm with regulatory breaches when they refuse to provide the information. The core of the issue, reckons Ross, is that the PRC authorities (nominally the CSRC) forbid PRC companies and their auditors from releasing this information to foreign regulators on the grounds that it may contain ‘state secrets.’ The problem is, of course, that PRC authorities can and often do, regard all information in or about the PRC as ‘state secrets.’ “Consequently, the auditors are caught in a regulatory sandwich between the increasingly aggressive demands of the SEC and the stonewall position of the PRC authorities. The SEC actions follow on from the more restrained, but persistent and continuing, efforts of the PCAOB. It is reported that around 15 HK audit firms have been subject to SEC/ PCAOB examination,” adds Ross. Another key issue to watch out for in 2013 is the introduction of statutory enforcement of Hong Kong’s ‘continuous disclosure’ regime for ‘price sensitive information’ or PSI. Hong Kong, like Australia, Singapore, and Malaysia, has a continuous disclosure requirement for release of PSI by listed companies. There are carve-outs and safe harbours in all the continuous disclosure jurisdictions but whether these protections are available to the company in any particular situation can be very difficult to judge, reckons Ross. The new PSI Law begins operation on 1 January 2013 and will be operated by the SFC but Ross reveals some trepidation amongst directors and company secretaries about how aggressive the SFC enforcement of the
Andrew Ross
Roy Lo
new PSI will be. The new statutory penalties include barring officers from managing a listed company and barring them access to the financial markets for up to 5 years, costs of the investigation and prosecution and a fine on each guilty officer of up to HKD8 million (USD1 million). “Given that the previous SEHK prosecutions seemed to run at about one or two cases per month, these fears may be well founded,” warns Ross. From the FRC to HKICPA Lastly, the pending transfer of audit practice review responsibilities to the Financial Reporting Council or FRC is also expected to make a noise in the industry in 2013. While the FRC’s main work is to regulate financial reporting by HK listed companies and the auditor’s work on those financial reports, the job has inevitably been focused on the work of auditors rather than the responsibilities of the directors of listed companies. Ross notes that the HKICPA, the statutory body responsible for registration and regulation of accountants, has run a full-on programme of practice review by HKICPA staff for over 20 years. But the government has decided that the practice review should be transferred to the FRC as the HKICPA is not perceived overseas as a body independent of the profession. “In my view, this reason is a triumph of form over substance because in my lengthy and extensive experience in regulation in a number of countries, the HKICPA regulatory performance in terms of response, investigation and prosecution is amongst the most (if not the most) thorough and aggressive in the World. It is certainly much more active and successful than most formally independent accounting regulators that I have had experience of in other countries,” he says. All this comes on top of the perennial issues such as: the world economy; squeeze on audit fees; retaining staff during a market downturn; staying competitive etc; which all seem relatively pale compared to the three Kings of the three regulation issues, Ross concludes. HONG KONG BUSINESS ANNUAL 2013 13