21/3/2018-6

The two major suspense of the reform of the financial exchange bureau

The Mainland opened the door to welcome the return of unicorns to the A-shares, which made it once again worry that Hong Kong would be marginalized and dragged down the stock price of the Hong Kong Stock Exchange (00388). However, Hong Kong’s financial markets have always been well supervised, international standards and other selling points, one forty-five not easily be replaced. Just as the Financial Reporting Council (FRC) is brewing major reforms to promote the transformation of Hong Kong’s auditor industry from “self-regulatory" to “independent supervision", not only in line with European and American markets, but also to strengthen the audit of financial statements of listed companies, reducing such things as " “Scallops are missing” and “white wine evaporates” and other risks of fraud and investor protection. It is understood that the financial sector in Hong Kong has expressed support for this, but there is still a consensus on whether the “where does the money come from" and whether it can be “one step at a time."

The story begins with the 2001 explosion of Enron. The company and Arthur Andersen, the auditors’ bank, have long linked together to create fake assets of 100 billion U.S. dollars. After the disclosure, the company’s market value has shrunk from 80 billion U.S. dollars to 200 million U.S. dollars. Eventually more bankruptcy ended, and a large number of investors had lost everything. The incident also exposed the philosophical issue of “auditors auditing listed companies, who will audit the auditors” and prompted the global industry to thoroughly review and advance reforms, including the International Monetary Fund (IMF), the International Securities Regulatory Commission (IOSCO), and the independent The International Forum of Audit Regulators (IFIAR) and the European Commission (EC) have successively issued guidelines requiring auditors everywhere to “own themselves” and must be transformed into “independent supervision”.

There is neither a dragon knife nor a sword

Until now, 45 economies around the world have completed reforms and achieved double Q certification. They are also IFIAR members and have obtained EC ECequivalence status, mainly US, UK, Germany, France, Australia, Japan, and Singapore and other developed countries. At the same time, there are 8 economies that only meet the EC equivalent qualifications, and 8 other economies are only IFIAR members. In other words, Tu Longdao and Yitian Sword only have one, and they have not yet done it.

As for Hong Kong, it is relatively backward. At present, it neither meets the EC equivalent qualifications nor has it become an IFARA member. Tu Longdao and Yitian Sword both spoke of it. The IMF also named Hong Kong in this respect in 2014. Interestingly, many people in mainland China, which is regarded as having less regulation than Hong Kong, are already among the eight EC eligible economies. This qualification is due to the fact that the auditor must be subject to some degree of third-party supervision, and the mainland government is “without paying any attention” under special national conditions. Just as “National Teacher” Liu He emphasized “Party Administration, Military and Civilology, East, West, and South China,” The party is leading everything, and the auditor is no exception, so it can also meet EC qualification.

Late arrival is better than that. Since 2013, the Finance and Exchange Bureau has promoted the auditor industry to become an independent regulator. Now it has entered a straight path. It has just submitted an amendment bill to the Legislative Council and proposes that it be the independent auditor supervisory authority. To include about 2,200 listed companies, about 50 auditor firms, and relevant persons in charge and partners in Hong Kong, such as 5% of listed companies that will conduct at least four major auditor firms (Big 4) in the first year of entry into force. report. It is understood that the draft has in principle been widely supported by the auditors’ industry, financial market stakeholders and relevant members. It is expected that the clearance opportunities will be very high. However, there are still two major suspense unresolved.

Whether there is still a difference in “one step"

The first is “where does the money come from?" If the bill is passed, the annual expenditure of the Finance Bureau will increase from about 30 million yuan to 99 million yuan (2019). According to the draft proposal, the money will be collected on the “user pays" principle to securities dealers (50%), listed companies (25%) and auditors (25%). However, during the deliberation of the Legislative Council, industry stakeholders and lawmakers raised different opinions. Some people think that the government should share some of the costs. Some people also worry that the Financial Services Bureau is “too weak” and it is hard to bear the potential legal expenses. It will cause controversy on audit issues in the future. At the same time, he feared that the other party would be able to see through the “second shot at the end" and boldly fight for a lawsuit. Therefore, Liang Jichang, a member of the accounting department, suggested that the government should provide a 600 million yuan seed fund.

Secondly, since the draft proposal stipulates that “most of the members are non-practitioners”, Hong Kong will only become an IFARA member even if it passes the Legislative Council. It is not yet eligible for EC equivalent because the latter requires third-party supervision. Members “"All" are non-practitioners." It is understood that the Financial Welfare Bureau originally hoped that this reform step will be put in place and that Hong Kong will be in line with the capital markets such as the Anglo-American Law, Germany and Japan, that is, it will become an IFARA member and be eligible for EC equivalent, but there are still differences within the auditor industry.

Some people in the industry are concerned that if they are fully supervised by “foreigners” in the future, they may not be familiar with the continuously updated auditing standards and it is difficult to protect the interests of the industry. Therefore, the insisting members must include current certified public accountants. The Financial and Economic Affairs Bureau sent a “minding pill”, saying that the regulatory members will be mainly financed by senior financial industry stakeholders, including accountants from the accounting profession, and no practitioners in the past three years. This will ensure sufficient “sticky” and clear conflicts of interest. In order to meet the EC standards, there will also be an appeal mechanism. As for Big 4 and other international banks, they are already familiar with the IFA and EC standards in the European and American markets. They are not so worried about the issue of “inside pedestrians control pedestrians." They also tend to agree that after Hong Kong’s recovery, they will fill loopholes in one step and think that it will help the Hong Kong industry to obtain More business, the benefits outweigh the disadvantages.

Regarding the two major suspense of “where does the money come from” and whether it is “one step at a time,” stakeholders from all sectors are still pondering the consensus and the draft submitted to the Legislative Council can still be amended. The Finance Bureau has an open mind. Of course, the most ideal one can be filled with food. For example, the government provides large sums of money and meets IFAIR and EC standards at the same time; but if it eventually only triples, it will “eat food and live first” and strive for The formal entry into force in August next year will at least allow Hong Kong to consolidate its advantages in terms of regulatory compliance and international integration, and meet the challenges posed by the mainland A-shares.