Self Regulation of AccountingSelf Regulation of Accounting
Presented by:
Stanley Wong 50185329
Anny Tang 50185631
Amanda Li 50184554
Sherona Hung 50121567
AC4304 Financial Reporting Theory
is not Satisfactoryis not Satisfactory
1. Background info of Self Regulation
2. HKSA
3. Conflict of Interest
4. Recommendations
5. Enron Case
AC4304 Financial Reporting Theory
Self Regulation of Accounting is not Satisfactory
Agenda
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
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
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Transparency of HKSA
The Composition of HKSA’s Council12 = Professional Accountants
2 = Government appointed
Disciplinary Panel & Investigation Panel are appointed by the Council
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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
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Nature of HKSA
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Guidelines & Rules established in HKSA
The Empowerment of HKSA
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
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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
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The Empowerment of HKSA
Empowerment of HKSA is limited
Both guidelines & disciplinary actions
SSAP only serve as an guideline, no legally binding purpose
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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
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Conflict of Interest
Issue of integrity Elements of ethical guideline for auditor,
including integrity & independency Give a true & fair view
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But in the real world, can the accounting firm
do their job independently?
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’
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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
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Conflict of Interest
There are many temptations
E.g. in Enron case, Enron gave Arthur
Anderson US$1m / week
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Conflict of Interest
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Moral Level of Accountant Conflicts of interest
How to regulate themselves
Recommendation – Establish law to govern the activities of accountant
Give an advice to their members The highest penalty is terminating its membership 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
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Hold disciplinary hearings in public More non-accountants in the Disciplinary
Committee
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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
Recommendation –Alter the nature & power of HKSA
The work for Ethics Committee Develop self-regulation through teaching Develop self-regulation through exams Development of new standard & guidelines
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Recommendations
Development of new ethical guidance Updating of the HKSA's existing ethical
Statements & Guidelines Interpretations of ethical Statements &
Guidelines
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The Work for Ethics Committee
Develop self-regulation through teaching & examination
HK Polytechnic University,
‘Ethics in Accounting’
a mandatory course for 3rd yr students
QP examination => more ethics questions
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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
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Enron Case
Enron: Giant energy-trading firm
Sought Bankruptcy Protection
after announcing overstated profits
> US$0.5 billion over 4 years
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WHY ?
Enron Case
Arthur Andersen not doing as a good watch dog !!
The audit firm failed to regulate itself
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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
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Q
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A&
The
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End