The UK is a member of International Forum of Independent Audit Regulators (IFIAR) with the FRC established as a statutory body to establish, oversee and enforce audit standards.
In contrast, the United States has only more recently become a member of IFIAR following the establishment of the Public Company Accounting Oversight Board (PCAOB), which was created by SOX to oversee auditors. Importantly, SOX puts explicit responsibility on the CEO for certifying the soundness of accounting and disclosure procedures and goes beyond a mere certification that generally accepted accounting principles are being followed - in many instances it was the case that adherence to those principles were in any case inadequate. While both the SEC and the Exchanges have a measure of oversight of financial reporting vis-a-vis their roles in relation to ongoing disclosures generally, the PCAOB is empowered under section 101 of the SOX to oversee the audits of public companies. This encompasses monitoring, inspecting and disciplining public accounting firms and associated persons for non-compliance with SOX, the rules of the PCAOB, and the SEC. Membership of IFIAR has aligned the United States with the typical structure seen in the other jurisdictions reviewed, other than Mainland China.
In Singapore, with the enactment of the Accounting Standards Act (Chapter 2B) in 2007, the Accounting Standards Council (funded by the MoF) was formed to formulate financial reporting standards for companies. On the other hand, ACRA monitors and enforces compliance with accounting standards including the financial reporting standards for companies. Singapore is a member of IFIAR as the majority of ACRA board is non¬practitioners so is independent of the audit profession.
Similar to the UK, Mainland China has placed the standards setting and enforcement power in one body, namely the MOF, which is the policy maker of the Accounting Rules of Enterprises, and enforces the Accounting Law (1999) and is in charge of supervising the implementation of accounting rules and regulating registered accountants and accounting firms. The China Accounting Standards Committee (the «Committee»), established in October 1998, under the Ministry of Finance (MOF) is the advisory body for setting Mainland Chinese accounting standards providing advice and recommendations on setting and improving Mainland Chinese accounting standards. These standards substantially converge with the IFRS issued by the IASB. MOF also regulates companies' financial reports. All companies must issue annual financial reports that are audited by a registered accounting firm. MOF is also responsible for the financial matters concerning SOEs. One major difference between the UK and the Mainland Chinese system is that MOF is under the authority of state council therefore liable to political influence or interference by the government, whereas FRC in UK is a more independent body from the government. This may explain why Mainland China is not a member of IFIAR.
Hong Kong
In contrast, Hong Kong currently operates a self-regulatory regime and is not a member of the IFIAR, although plans to establish an independent audit body are in place. At present, the oversight of financial reporting and auditing in Hong Kong is instead subject to a self-regulatory regime undertaken by the HKICPA, which undertakes registration, inspection, and enforcement or discipline of audit firms, as supplemented by the FRC. The FRC's role is presently limited, and includes conducting investigations into possible auditing and reporting irregularities of listed issuers but, importantly, not the disciplinary powers as the PCAOB possess. There are proposals to develop the FRC's role into an independent audit regulator with more responsibilities, and powers, and this will require new legislation to be passed.
Discussion
Hong Kong has not been without its share of problematic listings that have involved financial mis-disclosure that have caused some concern over the audit process and the quality of financial statements - this includes issues surrounding the audit firm as well as the means by which the issuer interacts with it, a particular focus of the interaction being the role of the audit committee, as discussed in Section 3.3.4 «Audit committee» below. By 2012, 13 listed companies had been put on watch by FRC for alleged auditing problems. The Number of complaints received by FRC in the last two years has increased but the number of investigation and enquiry initiated remains low. The increasing predominance of Mainland Chinese businesses on the SEHK is of particular relevance in view of investigations undertaken by the SEC around the time cautionary reports were issued by Moody's and the New York Times - in each case relating to Mainland issuers - and a number of cases where that concern has materialized.
Participation in IFIAR is an important step to bring Hong Kong into alignment with international practices, particularly following the United States accession to IFIAR membership subsequent to the establishment of the PCAOB in 2002. The key to this is the basis on which the FRC is developed, in particular as regards its independence and the means by which disciplinary power is to be exercised over audit firms. However, what is arguably more important in practice is the ability to effectively oversee audits of Hong Kong listed issuers that are based in Mainland China. The problem of cross border enforcement and the need for effective co-operation mechanisms, such as MoUs with the regulator in Mainland China, has been discussed in Section 3.2 «Non-locally incorporated companies».