HKSA PSS Qualification Programme

1. HKSA PSSQualification Programme Case Analysis Competition 2003 Presented by: Chan Ka Sing, Kenneth Heung Ka Lok, Mike Poon Wing Ho, Gary Tsang Lok Yin, Leo

2. Overview A&P Audit Firm Illegal workers Briberies Fund Investment in HT? Attractive tenancy offer? Computer system development for HT ? CE Robin (A&P’s CPA) Partner-in-charge of CE’s engagement ≈10 % of Revenue Related Company ICAC Disclose to the public? Disclose to ICAC? HT David Investigator (Alan’s friend) Alan (Newly qualified CPA) 1st listing engagement to A&P

3. Confidentiality Issues: Introduction Information should be solely for carrying out professional duty (HKSA Statement of Professional Ethics 1.204B.3) Duty of confidentiality is NOT absolute (HKSA Statement of Professional Ethics 1.204A.1) • Illegal Workers Issue • Labor costs were significantly low • CE’s customers were aware of the practice • Briberies Issue • Unexplained payments were found

4. Confidentiality Issues: Illegal workers (1) Profit-concerned Approach Short-term effects • CE’s relationship with A&P could be maintained • More business opportunities offered by CE Long-term effects • A&P would face a credibility crisis • Parties involved would face legal prosecutions • Professionalism within the accounting industry would be discredited

5. Confidentiality Issues: Illegal workers (2) Ethics-concerned Approach • Record and discuss findings with Robin (HKSA Statement of Auditing Standards 120.29) • Consult CE’s lawyers & management • Further consult A&P’s lawyers • Consider withdrawal from the engagement (HKSA Statement of Auditing Standards 120.83)

6. Confidentiality Issues: Illegal workers Short-term effects • Relationship between A&P and CE would be strained • A&P would lose business from CE & HT (2) Ethics-concerned Approach (Cont’d) • Long-term effects • Reputation of A&P could be retained • Alan could continue pursuing his career • Integrity of the accounting profession could be maintained

7. Confidentiality Issues: Illegal workers Alan SHOULD: • Persuade Robin not to disclose, but to discuss with CE’s management (HKSA Statement of Professional Ethics 1.204A.16) • Suggest withdrawalfrom the engagement • Remind CE the possibility of detecting its illegal acts by competitors • Propose to investigate A&P’s default in previous years Recommendation

8. Relationship-concerned Approach • Preserve his relationship with David Professionalism of Alan & A&P would be challenged Ethics-concerned Approach • Maintain professionalism of Alan & A&P Relationship between Alan & David would be impaired Confidentiality Issues: Briberies Disclose to David due to the public interest and authorization (Prevention of Bribery Ordinance S.13&14(d)) Duty of Confidentiality is NOT absolute (HKSA Statement of Professional Ethics 1.204B.11) Trade-off Relationship & Professionalism

9. Confidentiality Issues: Briberies Recommendation Unauthorized under law • Breach of professional duty Not disclose Not in a position to discuss CE’s affairs Authorized under law • Sustain a close relationship with David Disclose to other investigators  Avoid misunderstanding Legal advice to clarify the legal duty

10. Independence Issues: Other services: IPO • Appointed as reporting accountant of HT and auditor of CE  Independence should be remained (HKSA Statements of Professional Ethics 1.203) Recommendation • Suggest another colleague to be in-charge of the IPO project ( HKSA Statement of Auditing Guideline 3.340)

11. Independence Issues: Audit Fee • ≈10% annual revenue from CE’s group  Recurring fees < 15% of gross fees & practice ( HKSA Statements of Professional Ethics 1.203.4) Recommendation • Closely monitor A&P’s position when audit fees from CE’s group > 10% of its annual revenue

12. Independence Issues: Fund Investment • Robin’s wife invests in a fund which contains HT’s share  Avoid any direct/ indirect personal benefits from an engagement ( HKSA Statement of Professional Ethics 1.203.15) Recommendation • Dispose the fund as soon as possible ( HKSA Statement of Professional Ethics 1.203.17)

13. Independence Issues: Tenancy Offer • Receive tenancy offer = conflict of interest  Threaten the objectivity of Robin ( HKSA Statement of Professional Ethics 1.203.34 & 35)  Value of the rental offer ≠ modest  Breach of the Prevention of Bribery Ordinance Recommendation • Reject the offer

14. Independence Issues: Advisory for computer system Robin’s son has business with HT  Close relationship between Robin & HT, which endanger objectivity of Robin ( HKSA Statement of Professional Ethics 1.203.12) Recommendation • Arrange other partners to be in-charge of the engagement

15. Conclusion: Excerpt As Stephen Chan, Deputy Director of HKSA, once wrote, “Auditors are required to exercise professional judgment, rather than following certain prescriptive rules, such that independence of mind and independence in appearance are not compromised”

16. Conclusion: Present & Future Present When confronted with ethical dilemma, he should bear in mind his: • Professionalism, and • Commitment Future • Setting up Independent Investigation Board • Helping to exercise professional judgment

17. The End Thank You for Your Attention