Self Regulation of Accounting Presented by: Stanley Wong Anny Tang Amanda Li Sherona Hung AC4304 Financial Reporting Theory is 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 A genda

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 AC4304 Financial Reporting Theory

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

Transparency of HKSA Investigation process of complains : secret low transparency public are difficult to monitor Protecting Accountants benefits Among 80 complaints, only 12 approved AC4304 Financial Reporting Theory

Nature of HKSA AC4304 Financial Reporting Theory 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 AC4304 Financial Reporting Theory

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

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

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

Conflict of Interest Issue of integrity Elements of ethical guideline for auditor, including integrity & independency Give a true & fair view AC4304 Financial Reporting Theory 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 AC4304 Financial Reporting Theory

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

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

Conflict of Interest AC4304 Financial Reporting Theory 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 AC4304 Financial Reporting Theory

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

Expand HKSAs 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 AC4304 Financial Reporting Theory Recommendations

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

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

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

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

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

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

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