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Objection Letter and Formal Submission to the HKICPA - Invitation to Comment on Exposure Draft of the Code of Ethics for Professional Accountants

20 October 2020
 

Mr Johnson Kong

The President

Hong Kong Institute of Certified Public Accountants

37/F., Wu Chung House

213 Queen's Road East

Hong Kong

Dear Johnson

Invitation to Comment on “Exposure Draft of the Code of Ethics for Professional Accountants – Chapter G Section 100 Professional Ethics Relevant to Anti-Money Laundering and Counter-Terrorist Financing Compliance for Accounting Professionals” (“the Exposure Draft”)

In respect of the Exposure Draft of the Hong Kong Institute of Certified Public Accountants (“the Institute”), Accounting Development Foundation Limited (“ADF”) fully supports all CPAs and practice units “to preserve and maintain the reputation, integrity and status of the accounting profession”. However, after we sent letters of 28 August 2020 and 14 September 2020 to your Chief Executive and Registrar that set out our questions, reservations and observations on the Exposure Draft during the extended consultation period of the Exposure Draft, the Institute has not provided us, the fellow members and the fellow accounting professional bodies with any replies on our questions, reservations and observations. Instead, even we together with representatives from other fellow accounting professional bodies had taken initiative to meet and correspond with the Institute to clarify and address our questions, reservations and observations, more questions, reservations and observations have been raised without answers. In consequence, we must formally tender our objection to the Institute’s finalisation of the Exposure Draft. We also urge the Institute to withdraw the Exposure Draft and urge you together with the Council to sincerely and seriously consider and address the issues as set out below.

1. Due process and sufficient and adequate consultation

On one hand, all our points raised in our letters of 28 August 2020 and 14 September 2020 are still valid and we look for the Institute to reply and address them seriously and properly. Please refer to the letters. On the other hand, we would like to draw your attention to the importance of a proper and faithful due process and consultation with the fellow members.

Once again, it would be unbelievable that a consultation of the Exposure Draft affecting all 46,000 members with proposed disciplinary actions would last only one month in the peak of COVID-19 pandemic. Moreover, there were no survey, no questions to invite comments, no briefing, and no legal opinion are provided to the members in order to assist them to understand the implication of the Exposure Draft and to provide feedback.

Based on a survey conducted by ADF together with other 5 professional accounting bodies with over [800] responses (“the survey”), nearly all (over 95%) responses of the survey considered that the Institute’s consultation on the Exposure Draft should be longer and should provide more briefing and explanation to the members. In addition, the Institute not only has not provided briefing, explanation and legal advice to the fellow members in the consultation, but also created a feeling to the members that the Institute would not listen to the members. As the actions proposed by the Exposure Draft would be taken out from 6 November 2020 and, even a briefing video was additionally provided on 12 October 2020, it was only one week before the end of the consultation. Not to mention that, that video has not addressed the questions and reservations but has created additional questions and reservations.

The Exposure Draft which, prima facie, overrides the principle of separate legal entity and affects all 46,000 members. It is material enough for the Institute to explain in detail to the members by say a webinar with questions and answers session to the members. The video of 12 October 2020 has helped to create more questions rather than let the members understand the Exposure Draft more.

We do urge you and the Council sincerely and seriously conduct a proper and faithful consultation on all the exposure drafts in the future.

2.The FATF recommendations are not local laws in Hong Kong

We of course recognise that Hong Kong is a member of The Financial Action Task Force (“FATF”). However, the FATF recommendations are not the laws of Hong Kong. As a statutory body, the Institute follows the Professional Accountants Ordinance (“PAO”) and other applicable Hong Kong laws. If the Institute considers that the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (“AMLO”) defined it as a regulator of the accounting profession and there may be a gap between the AMLO and the FATF recommendations, the Institute should report to the Hong Kong Government to amend the relevant laws of Hong Kong.

The Institute insists that the Exposure Draft is within the Institute’s authority. Unfortunately, we and the majority of the fellow members (over 75% of the responses in the survey) do not agree it and also do not have the opportunity to read the legal opinion that the Institute has obtained. Personally, as an ex-regulator and testified securities expert witness, I rely on factual evidence rather than hear-say evidence.

The Institute must act legally in mind and in appearance. Prima facie, many fellow members (over 75% of the responses in the survey) had not considered that the Institute would act legally in appearance if it acted in accordance with the proposal in the Exposure Draft. Indeed, it is not only a legal question, but also a communication breakdown and member engagement problems between the Institute and the members.

3.The FATF recommendations have not recommended those proposed in the Exposure Draft

FATF has published since 2019 “Guidance for a Risk-Based Approach for the Accounting Profession” (“the Guidance”). Paragraph 20 of the Guidance states that “the actual services delivered by accountants may vary between jurisdictions and the examples provided here may not be applicable in every jurisdiction. Services may include (but are not limited to) the following, though not necessarily to the same client. The FATF recommendations apply to specified activities in R.22 (see paragraph 31). (underline added)”

The FATF’s “actual services” are identical to the “professional services” as defined in the Exposure Draft while the “specific activities” are similar to the “specified transactions” as listed out in the AMLO. In other words, the FATF recommendations apply to “specified activities” only while the proposal in the Exposure Draft is clearly and obviously not those of the FATF recommendations.

In short, the proposed widening of scope to “professional services” or “actual services” in the Exposure Draft is clearly not the FATF recommendations.

In addition, many fellow members (over 80% of the responses in the survey) disagreed the scope of monitoring going beyond the AMLO and the FATF recommendations to the “professional services” or “actual services”.

4. Authority of the Institute

The authority of the Institute is empowered under the PAO, no more and no less. We do not understand why the Institute would have the authority under the PAO to override the “separate legal entity” principle and the well-known case “Salomon v A Salomon & Co Ltd”. We also do not understand why the Institute would have authority under the PAO over the Hong Kong network and professional service entities and enforce them as if they were a practice unit. In addition, we would like to draw your attention to section 29(3) of the PAO and the proposal in the Exposure Draft may violate it.

A lot of fellow members (over 85% of the responses in the survey) considered that the Institute would act beyond the “separate legal entity” principle, the AMLO and the PAO if it acted in accordance with the proposal in the Exposure Draft.

5. Complaint and disciplinary action proposed in the Exposure Draft

The Exposure Draft states that “unless constituents have a reasonable excuse which has been explained to the Institute in writing within the time frame specified, failure or neglect to provide the information requested by the Institute for regulatory purposes shall result in a complaint being raised and might consequently lead to disciplinary action against the constituents.”

In the first place, the constituents and the professional services proposed by the Exposure Draft are not within the scope of the AMLO. Then, of course, the proposed actions and penalties to the members are thus unreasonable and in excess of what may be considered as enough to encourage the members to provide the information requested by the Institute. A lot of fellow members (over 80% of the responses in the survey) did not support such proposal in the Exposure Draft.

6. Entities and individuals that provide specified activities/transactions

If the Institute really considers that there might be a gap between the AMLO and the FATF recommendations on those entities and individuals that provide specified activities (or specific transactions), in particular those non-incorporated entities, the institute should report it to the Hong Kong Government to amend the relevant laws of Hong Kong.

Most importantly, those non-incorporated entities established by non-professional accountants should also be regulated. The non-incorporated entities established by non-professional accountants to provide professional services have not been regulated properly under the laws of Hong Kong for years.

We sincerely hope you and the Council have heard the voice of the members and proceed to address and reply the demand and concerns of the members.

If you have any questions, please feel free to contact us.

Yours sincerely

Louis CHOW

Chairman, Accounting Development Foundation Limited

cc    The Legislative Council representative of the accounting profession 

        The Council, HKICPA

        Ms Margaret W.S. Chan, Chief Executive and Registrar, HKICPA

        Quality Assurance Department, HKICPA