Self Regulation of Accounting

1. is not Satisfactory Self Regulation of Accounting Presented by: Stanley Wong 50185329 Anny Tang 50185631 Amanda Li 50184554 Sherona Hung 50121567 AC4304 Financial Reporting Theory

2. Self Regulation of Accounting is not Satisfactory Agenda • Background info of Self Regulation • HKSA • Conflict of Interest • Recommendations • Enron Case AC4304 Financial Reporting Theory

3. Background info of Self Regulation • Like other professions, accountancy bodies are self regulated since beginning • Membership admission, behavioral requirements, disciplinary penalties, etc are its essential elements AC4304 Financial Reporting Theory

4. Background info of Self Regulation • In UK from 1980s, self-regulation is governed by professional bodies itself • e.g. • Investment Business Regulations • Insolvency Licensing Regulations • Audit Regulations AC4304 Financial Reporting Theory

5. Transparency of HKSA • The Composition of HKSA’s Council 12 = Professional Accountants 2 = Government appointed • Disciplinary Panel & Investigation Panel are appointed by the Council AC4304 Financial Reporting Theory

6. Transparency of HKSA • Investigation process of complains :  secret  low transparency  public are difficult to monitor • Protecting Accountant’s benefits • Among 80 complaints, only 12 approved AC4304 Financial Reporting Theory

7. Nature of HKSA • Guidelines & Rules established in HKSA • The Empowerment of HKSA AC4304 Financial Reporting Theory

8. Guidelines & rules established in HKSA • HK Statements of Professional Ethics : • Based on old UK ethical rules • Established when most accounting firms’ work was auditing • SFC Director of Accounting Policy,  During 90s accountants are required to perform more variable works than before AC4304 Financial Reporting Theory

9. Guidelines & rules established in HKSA • Current rules cannot fit in nowadays accounting need • Only general guidelines, lack of detailed descriptions • HKSA has the power to amend regulations AC4304 Financial Reporting Theory

10. The Empowerment of HKSA • Empowerment of HKSA is limited  Both guidelines & disciplinary actions • SSAP only serve as an guideline, no legally binding purpose AC4304 Financial Reporting Theory

11. The Empowerment of HKSA • Conduct disciplinary hearings • Impose sanctions on its members • Reprimand orders • Penalties up to $500,000 • Removal from its professional accountant registry • Empowerment is not enough AC4304 Financial Reporting Theory

12. Conflict of Interest • Issue of integrity • Elements of ethical guideline for auditor, including integrity & independency • Give a true & fair view But in the real world, can the accounting firm do their job independently? AC4304 Financial Reporting Theory

13. Conflict of Interest • Many provide auditing service & consultant service to the client at the same time • Not easy to get a balance between Objectivity & Conflict of interest • Rely on the ‘Great Wall’ AC4304 Financial Reporting Theory

14. Conflict of Interest • A research on accounting ethics, by Defining Issues Test (DIT) Accountants’ moral development is not as advanced as other populations with similar levels of education, & that those with lower levels of moral reasoning are more likely to engage in dysfunctional behavior AC4304 Financial Reporting Theory

15. Conflict of Interest • There are many temptations • E.g. in Enron case, Enron gave Arthur Anderson US$1m / week AC4304 Financial Reporting Theory

16. Conflict of Interest • Moral Level of Accountant  • Conflicts of interest How to regulate themselves AC4304 Financial Reporting Theory

17. Recommendation – Establish law to govern the activities of accountant • Give an advice to their members • The highest penalty is terminating itsmembership • The warning is not harsh • Establish law to govern the accountant is essential • e.g. they should not provide audit work & consultant service to the same client at same time AC4304 Financial Reporting Theory

18. Recommendation – Alter the nature & power of HKSA • Hold disciplinary hearings in public • More non-accountants in the Disciplinary Committee AC4304 Financial Reporting Theory

19. Recommendation – Alter the nature & power of HKSA • Expand HKSA’s power to obtain info from suspected accountants • Regularly review the transparency of self regulation  Construct a transparent, convincing monitoring system AC4304 Financial Reporting Theory

20. Recommendations • The work for Ethics Committee • Develop self-regulation through teaching • Develop self-regulation through exams • Development of new standard & guidelines AC4304 Financial Reporting Theory

21. The Work for Ethics Committee • Development of new ethical guidance • Updating of the HKSA's existing ethical Statements & Guidelines • Interpretations of ethical Statements & Guidelines AC4304 Financial Reporting Theory

22. Develop self-regulation through teaching & examination • HK Polytechnic University, ‘Ethics in Accounting’ a mandatory course for 3rd yr students • QP examination => more ethics questions AC4304 Financial Reporting Theory

23. Development of new standard & guidelines • Development and publication of the joint publication Ethics in Management - A Practical Guide for Professional Accountants • Revise the old code of ethic with IFAC s8 AC4304 Financial Reporting Theory

24. Enron Case • Enron: Giant energy-trading firm • Sought Bankruptcy Protection • after announcing overstated profits > US$0.5 billion over 4 years WHY ? AC4304 Financial Reporting Theory

25. Enron Case • Arthur Andersen not doing as a good watch dog !! • The audit firm failed to regulate itself AC4304 Financial Reporting Theory

26. Enron Case Problems : • Conflict of interest • Many Enron top financial executives were former AA employees • Revenue from Enron to AA is very large • Non-transparent operation • No formal commission or organisation AC4304 Financial Reporting Theory

27. Q & A AC4304 Financial Reporting Theory

28. The End AC4304 Financial Reporting Theory