Code of Ethics – Practical Implementation issues in Mainland China and Hong Kong

1. Presented by : Albert Au HKICPA Representative to IFAC SMP Committee Venue: Institute of Chartered Accountants Australia 16 September 2013 Code of Ethics – Practical Implementation issues in Mainland China and Hong Kong

2. Agenda • Opening remarks • Our limited internal consultation • Background - Accounting industry environment in Mainland China and Hong Kong • Implementation Issues in Mainland China • Implementation Issues in Hong Kong • Accountants' perspective • Regulators' perspective

3. Opening remarks • A distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in the public interest • By guiding and regulating ethical behavior of accountants, the Code impacts every member of the profession whether in public practice or in business • Being an international standard setter, the work of IESBA is important and is taken very seriously by all stakeholders • The usability of the Code concerns both the effectiveness of the Code and relevance of IESBA

4. Our limited internal consultation Practical implementation issues in Mainland China • The Chinese Institute of Certified Public Accountants (CICPA) Practical implementation issues in Hong Kong Accountants' perspective • HKICPA Ethics Committee (consists of firms, SMPs, PAIBs and regulators) • HKICPA SMP Leadership Panel • HKICPA PAIB Leadership Panel Regulators' perspective • HK Securities and Futures Commission (HKSFC) • HK Financial Reporting Council (HKFRC) • Hong Kong Exchanges and Clearing Limited (HKEx)

6. Mainland China (excl. Hong Kong)

7. Hong Kong

8. Convergence of professional standards

10. Challenges to understand and translate the Code accurately • Translating the Code accurately into different languages is fundamental to globally consistent adoption • There may be difficulties to fully understand certain topics in the Code due to language issues, for example: • The ethical requirements of a network firm; • Differentiating similar wording like: senior personnel, senior level, seniority, senior individual, senior staff member, etc. • IESBA may consider to establish expert panel to support translation of the Code by non-English speaking jurisdictions

11. Adaptation of standards in local context • Professional ethics concerns behavior and courses of action, thus requirements on ethical behavior may be closely related to local laws, regulatory environment and culture • As an emerging economy, the cultural and legal environments in Mainland China are different from those in the Western world. These differences need to be considered in the standard setting process

12. Assistance to firms for effective implementation of the Code • Effective implementation of the IESBA Code relies on how the Code's requirements are translated by firms into in-house operational policies and procedures • The IESBA in cooperation with local standard setters may seek ways to assist firms in the translation process, especially for SMPs which generally possess limited resources. This can include developing a sample procedural manual for firms with case study examples for better illustration by practitioners.

13. Additional guidance for group audit/cross border engagement • Firms are increasingly involved in cross border engagements, which involve compliance with more than one set of ethics standards and/or involve component auditors • The Code in the meantime does not contain much guidance on such circumstances • IESBA is recommended to develop additional guidance on such group audit scenarios, including situations when component auditors needs to comply with (i) IESBA Code and (ii) ethics standards issued by other jurisdictions • This concern is also applicable to Hong Kong

15. Understandability of the Code • Accountants (including firms of various sizes and PAIBs) generally consider that the length and the drafting style makes understanding the Code difficult • IESBA may consider to: • Dissect the Code into standalone sets for: practicing accountant and PAIB; PIE and non-PIEs • Separate clearly between the requirements and guidance - similar to the drafting convention of ISA • Restructure the Code by topics - similar to International Standards on Auditing (ISA)

16. Understandability of the Code (Cont.) • IESBA may consider to: (Cont.) • More diagrams and flowcharts for easier illustration • Electronic version with search function – but flexibility is required for adaptation by individual jurisdiction • Separate those parts of the Code applicable/relevant to SMO (IFAC member body) vis-à-vis actual professional accountants

17. Additional guidance on materiality • The concept of materiality is widely used in the Code but the Code does not contain a definition and guidance to determine materiality • IESBA is recommended to develop additional guidance on determining what is materiality and how it is applied by professional accountants

18. SMP concerns on application of safeguards that involve segregation of duties • In Hong Kong, 98% of business units are SMEs. Such SMEs provide 47% of job opportunities in Hong Kong (excluding civil service) • Companies incorporated in Hong Kong are subject to statutory annual audit • Most SMEs are served by SMPs • SMEs usually seek for "one-stop shop" for bookkeeping, taxation and audit services as a matter of business convenience

19. SMP concerns on application of safeguards that involve segregation of duties (Cont.) • Example safeguards in relation to provision of non-assurance services to audit clients are typically segregation of duties in nature • Many SMPs have limited number of partners and employees • Many of them are even sole proprietors • This poses difficulties for them to implement safeguards which are related to segregation of duties

20. SMP concerns on long association of senior personnel with an audit client • Para 290.150 states that familiarity and self-interest threats are created by using the same senior personnel on an audit engagement over a long period of time • Example of safeguards provided include: • Rotating senior personnel off the audit team; • Having a professional accountant who was not a member of the audit team review the work of the senior personnel; • Regular independent internal or external quality reviews of the engagements

21. SMP concerns on long association of senior personnel with an audit client (Cont.) • It is not uncommon for a partner in a SMP to serve a SME client for a long period of time, due to the experience and knowledge of the client's business and established business relationships. Management of a SME may also have similar expectations • Implementing the example safeguards are challenging for SMPs given their practices usually have few staff or even no other staff (i.e. sole proprietor)

22. PAIBs concerns on review of Code's requirements • It is noted that IESBA is considering to review the ethical requirements specific to PAIBs (Part C of the Code) • It is noted that IESBA approved a project to review Part C of the Code. Phase I of the project will address: • pressure by superiors and others to engage in unethical or illegal acts • the responsibility of PAIBs to produce financial reports that are faithful representations of the economics of transactions and associated matters

23. PAIBs concerns on review of Code's requirements (Cont.) • It is appreciated that it may not be possible for the Code to describe all of the circumstances and relationships that could be encountered by a PAIB that create or may create threats to compliance with the fundamental principles • A full rule-based regime may not be feasible or preferable

25. Drafting style and structure makes the Code difficult to comprehend • Standard setters should first seek ways to improve the understandability of the Code and make the requirements more visible • There may be too much reliance on internal threats-and-safeguards approach • In some situations threats-and-safeguards approach may not be appropriate (for example: Para 210.6~7 - competence requirement on engagement acceptance) • "Inform those charged with governance / audit committee" may not always be ideal safeguard because of conflict of interest • It is not easy to find things black and white and identify who is accountable and/or responsible • Involvement of other teams within the firm may not always mitigate threats as the other teams are likely subject to conflict of interest in other ways (for example: remuneration, career progression, etc.)