Democracy and auditing | China Accounting Blog | Paul Gillis

Democracy and auditing

The Big Four accounting firms in Hong Kong took out an ad in Hong Kong newspapers opposing the democracy initiatives currently underway. This FT article has a translation of the ad and an analysis.

Twitter erupted with criticism of the firms:

Am I naive or is this outrageous meddling? Big four accounting firms warn Hong Kong over democracy push.
6/28/14, 10:10 PM

When @FT asked big four’s global headquarters for comment, "it emerged they had only learned of the advertisement through press reports."
6/28/14, 5:45 AM

"@SimonCYWong: Big Four audit firms sell out #HongKong: "It’s an act of cowardice" " #spineless Big 4?
6/28/14, 12:08 AM

It is assumed by many that the firms were pressured by their clients (the largest of which are Chinese state-owned enterprises) to place this ad. Certainly there are few instances in the past where the firms have spoken out in one voice for social reforms.  

The arrogance of the firms is stunning. Did they really think their voice would alter the debate? Do they really think people respect their opinions that much? Did they not see that all they were doing is setting themselves up for ridicule while diminishing their brand worldwide? 

The most important question is whether they have impaired their independence on their clients such that they can no longer serve as auditors. Hong Kong follows International Auditing Standards (IAS). The rules for independence of auditors are set forth in The Handbook of the Code of Ethics for Professional Accountants (The Handbook). 

The Handbook says that advocacy for a client can threaten independence:

200.6  Examples of circumstances that create advocacy threats (to independence) for a professional accountant in public practice include: …

A professional accountant acting as an advocate on behalf of a client in litigation or disputes with third parties.

Of course, the firms will argue here that they were acting in their own self-interest, and not on behalf of a client. Any documents that undermine that assertion will be unlikely to be examined under Hong Kong’s notoriously weak accountancy regulatory system.

Another rule requires that auditors maintain independence in appearance: 

290.6(b) Independence in Appearance

The avoidance of facts and circumstances that are so significant that a reasonable and informed third party would be likely to conclude, weighing all the specific facts and circumstances, that a firm’s, or a member of the audit team’s, integrity, objectivity or professional skepticism has been compromised.

This is a tougher one.  

Based on newspaper reports and tweets many third parties have concluded that the firm’s integrity, objectivity, and professional skepticism have been compromised. Are those reasonable and informed third party conclusions? Certainly there is enough smoke here that the HKICPAs ought to send in a team of firemen to see if there is a fire. But that seems unlikely to happen.

Independence rules aside, the firms would be wise to stay out of politics. Accounting firms have a diverse client base, and a diverse group of partners and staff. Taking a controversial stand on a political issue is bound to alienate many clients, partners, and staff. Is it really worth destroying trust to gain a few political points with certain elite clients?

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