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In 1997, the independence of Hong Kong was relinquished to the Peoples Republic of China (Wong, 2002). From that time, numerous vital development have occurred in Hong Kong one of them being its taxation regime. KPMG (2007) argues that the Basic Law that came into effect on July 1997 gave permission to the Hong Kong Special Administrative Region (HKSAR) to practice an independent taxation system and to take into consideration the low tax policy previously pursued in Hong Kong as reference, enact laws of its own concerning types of taxes, tax rates, tax reductions, allowances and exemptions, (p.2). In acting in accordance with this law, Hong Kong has continuously preserved independence not only of its taxation system but also of its accounting and auditing regimes.
Audit quality control in Hong Kong
Audit quality control in Hong Kong is governed by a number of principles and regulations that are documented in the Hong Kong Standard on Quality Control 1. This manuscript instituted essential values and fundamental actions and rules dealing with a companys obligations towards its composition of audit quality control and re-examination of past financial statements and related information. There are various elements that constitute the Hong Kongs audit quality control system namely: leadership duties for quality within the company, ethical standards, establishment and enhancement of client relationships, human capital, engagement performance and supervision (Hong Kong Institute of Certified Public Accountants, 2004).
Leadership
Leadership begins with the development of policies and regulations that enhance an in-house tradition based on the acknowledgment that quality is necessary in carrying out engagements. The policies and regulations mandate the chief executive officer to take full responsibility for the companys quality control system. The actions taken by the companys leadership influence the actions taken by the subordinate employees. As a result, the leadership should set a good example by being honest and engaging in open communication with employees at all levels of the companys management. More specifically, the leaders should ensure that their work conforms to the international professional standards and policies and regular reports are issued to the employees that address current situations. Leadership also entails engaging employees in regular training and education about the importance of maintaining integrity and high quality work. Such training and education can be carried out through workshops, seminars, formal and informal meetings as well as communicated through media channels such as newsletters and the companys website (Gloet, 2002). These measures help to nurture a culture of high quality work.
Of paramount significance is the requirement of a companys leadership to be familiar with the firms commercial strategy is dependent on the prevailing obligation for the firm to attain excellence in all the actions that the company takes. Hong Kongs companies are required to allocate their management duties in a manner that will ensure that the business-related deliberations do not make ineffective the eminence of the work carried out. In addition, the Hong Kongs rules and regulations dealing with the assessment of performance, reimbursement, and endorsement (through the enticement systems) with regard to employees, are structured to express the companies prevailing dedication to quality. Most importantly, Hong Kongs firms are required to dedicate adequate capital for the growth, certification and support of their audit quality control rules and policies (Ng, 2002).
Ethical standards
McGee, Ho and Li (2008) state that ethical principles have a crucial role to play in Hong Kongs audit control regime. Five principles of professional ethical standards are clearly specified in the Hong Kong Standard on Quality Control 1 which each company is required to uphold. These principles include integrity, objectivity, professional competence and due care, confidentiality and professional behaviour (Hong Kong Standard on Quality Control 1, 2005, p.5-6). Apart from these five principles, Hong Kong firms are mandated to ensure autonomy. This can be realized through policies and rules that are supposed to provide the companies with a sensible assurance that the corporation as well as its employees maintains sovereignty when and if needed. The mind-set and views of the tax and audit experts regarding the above stated ethical standards affect the measures taken by these professionals when carrying out their work. Tax professionals perceptions of the importance of corporate ethics and social responsibility generally had a significant impact on their ethical/social responsibility, judgments, which in turn influenced their behavioural intentions, (Shafer and Simmons, 2008, p.695).
Establishment and enhancement of client relationships
To guarantee high quality audit control, Hong Kong firms set up guiding principles and procedures for the acceptance and preservation of client relations and exact arrangements, planned to provide the firms with sensible assurance that they would only execute or uphold such relations under three circumstances. The first circumstance is that the company must observe the sincerity of the customer and must have dependable information that confirms the clients integrity. The second circumstance that must be met is the proficiency of the companies to carry out the engagements. Companies must have the potential, time and resources to carry out their appointments with their customers. The third circumstance is the capacity of the client to sustain the ethical requisites and principles instituted by the company. Hong Kong companies gather the above stated information prior to taking on any relations with a new customer and prior to prolonging an association with an existing one (Gloet, 2002). In situations where some problems have been identified and then worked out between a firm and a customer before the engagement of an association, a company is supposed to document the problems and the measures that were taken to solve them. The recording of such concerns offers firms with concrete evidence that can act as a shield in the future if a problem arises from their associations with clients..
In Hong Kong, audit firms are familiar with the value of their customer associations. Nevertheless, firms make certain that such associations and engagements are administered by the rules and regulations instituted in the country as well as the international rules. Companies generally have diverse groups working with different customers. Firms execute strategies that guarantee that associates of the engagement groups (mostly the less knowledgeable ones) are sufficiently familiar with the firms rules and regulations and most significantly the goals of the work they are dispensed to execute. Regular communication between the team members and between the workers and the leaders enable Hong Kong auditors to maintain high ethical principles and uniformity in their work. Consistency is often accomplished through written or electronic manuals, software tools or other forms of standardized documentation, and industry or subject matter-specific guidance materials, (Hong Kong Standard on Quality Control 1, 2005, p.29).
Human resources
Firms in Hong Kong acknowledge the significance of human resources in audit quality control systems. Firms thus institute guiding principles and regulations that are planned to provide them with sensible assurance that they have sufficient employees with the capabilities, skills, and commitment to maintain ethical standards in their jobs. Proficient workers additionally make it possible for Hong Kongs firms to give dependable financial declarations and statements to the members of the public and other parties that find such information useful. Firms guiding principles concerning human resources focus on aspects such as recruitment, performance evaluation, capabilities, competence, career development, promotion, compensation and estimation of personnel needs (Hong Kong Standard on Quality Control 1, 2005, p.36). The incessant expertise of employees depends to a great deal and to a considerable extent on an appropriate level of standard professional maturity to allow the employees to augment their knowledge and potential. Companies in Hong Kong therefore emphasise on the incessant learning and training of their workers through workshops, seminars, formal and informal meetings and media channels to equip them with much-needed knowledge and skills to uphold ethical work. They also offer their employees sufficient materials necessary for their professional and personal growth. Lin and Wang (2001) argue that Hong Kong, unlike the mainland China, has managed to align itself with the international accounting and auditing standards of financial information as a result of its forceful attempts to develop their employees professional lives.
Supervision and review
Quality audit control necessitates habitual and stringent regulation of the audit professionals and their work. Most of the companies that have been dissolved around the world did so because of the lack of effectual administration. In Hong Kong regulation of the auditing companies and employees is done on a regular basis. It involves following the progress and development of firms relations with their customers; and taking into consideration the capability and expertise of each of the workers. That is, checking whether the employees have sufficient time to complete their assignments within the assigned duration of time, if they know what they are doing, and if they meet the terms of the companys policies and procedures. Closely related to regulation is reassessment of work executed by the audit professionals (especially the less practised employees). Review is regularly carried out to make certain that work is executed according to the instituted rules and regulations and that appropriate and dependable information and reports have been recorded (Cho and Lew, 2000).
Challenges facing audit quality control regime in Hong Kong and recommendations
Regulatory framework
It is generally established that the latest Asian financial meltdown was caused by a loss of trust among investors as well as fragile corporate governance and the inability of many Asian firms to ensure corporate transparency (Rahman, 1997). During the past number of years, majority of the East Asian countries have been aggressively reviewing and enhancing their regulatory frameworks concerned with corporate governance, financial reporting and disclosure (Ho and Wong, 2003). Some scholars emphasise that the functioning of financial markets is comprised of two measurements: structure and process. Structure is concerned with the different rules and guiding principles governing the reporting of financial statements for instance the rule of mandatory disclosure. Process on the other hand is concerned with the flow of information and the communication process that take place between the company and its diverse stakeholders such as voluntary disclosure. Mandatory and voluntary disclosures harmonize each other in improving the total functioning of financial markets (Eccles and Mavrmac, 1995). From the perspective of a firm, firms which are inclined to reveal more valuable information are prone to obtain the advantage of a lower capital cost. Other probable advantages may consist of: reduction in agency cost, the enhancement of corporate image and steady or enhanced share price (Apple Daily, 2002).
In Hong Kong, the mandatory disclosure conditions are comparable to the mandatory disclosure requirements of majority of the Commonwealth economies implementing a common law system. In spite having a refined capital market and being perceived as the economy with the highest level of transparency in East Asia, the sum and extent of disclosure conditions (enclosed in the Company Ordinance, the stock-exchange listing regulations; the amalgamated Security and Futures Ordinances; and accounting principles) in Hong Kong are fewer and more constricted than those of more mature economies such as the USA and the United Kingdom. For example, until recent past, listed firms in Hong Kong were not required to reveal the state of their balance sheets in interim financial reports, and the cost of goods sold was unavailable in their income statements. In addition, other regulations presiding over related-party deals, compensation of firms directors and protection of minority shareholding are less rigorous than those in the USA and the UK (Ho and Wong, 2003).
Even though compliance with disclosure requirements by Hong Kong auditing firms is comparatively higher than its neighbouring economies, majority of Hong Kong firms continue to meet only the lowest disclosures requirements set by the accounting standards and the statutory prerequisites. This is regardless of the fact that the standard of annual reports has been increasing and changes in quality decreasing during the past five years. Given that the rules and accounting standards governing the listing of listing in Hong Kong are non-statutory, Hong Kong firms have substantial litheness in reporting and revelation of financial information. As a result, their disclosure preferences are prone to mirror intentional reactions to market conditions (Botosan, 1997). To overcome these challenges, companies in Hong Kong ought to offer more exhaustive scrutiny of their transactions and performance as well as other extra information that may be of importance to the users of the financial reports.
High rate of turnover among junior auditors
One of the major challenges currently facing the Hong Kong audit quality control regime is a high turnover rate of junior auditors (Chapel, 2001). The need for more junior auditors in Hong Kong increased significantly when Hong Kong was handed over to the PRC. Rao (2001, p.33) argues that, at least 350,000 accountants are needed to service the China economy. A study conducted by Chia (2003) of the values held by junior auditors shows that junior auditors are driven by material wealth, a search for meaning, expertise, affiliation and status. Junior auditors in Hong Kong are attracted to the accounting profession because of the high reputation and income it provides to the professionals. Second, the accounting profession enables the professionals to offer much-needed services to the members of the public and this provides them with a sense of meaning. Affiliation is achieved through regular interactions with fellow employees and management particularly because much of the work done is done through team work. Despite these benefits, the demanding nature of accounting/auditing as well as the lack of creativity and lack of ability to make meaningful decisions discourage many junior auditors in Hong Kong thereby creating a high rate or turn over among them. Lack of creativity and lack of ability to make positive contributions result from the conformity value that is inherent in the Chinese culture. Audit firms can overcome this challenge through various means: utilizing stress reduction strategies for their employees; involving the junior auditors in the decision making process to enable them feel part and parcel of the organization; and encouraging creativity among them (Collins, 1993).
Conclusion
The audit quality control system in Hong Kong is effective and highly reputable. This is because of the stringent rules and policies set by the Hong Kong Institute of Certified Public Accountants and which accounting and audit firms are required to uphold. The audit quality control regime carries out vigorous hiring of audit professionals to ensure that only the most competent individuals are hired. Continuous training of the professionals is also done on a regular basis to instil in them ethical standards. Vital and regular supervision of the employees and audit reports is done to ensure that employees conform to the local and international rules and regulations. The audit regime however needs to make improvements in the hiring and maintenance of the junior auditors, majority of who get discouraged earlier in their career. Improvements should also be made on Hong Kong regulatory framework to make it more rigorous. These actions will enhance the efficiency and effectiveness of the audit quality control system.
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