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Institute news

October 2017

Institute welcomes proposed tax measures in new policy address


Hong Kong Chief Executive Carrie Lam delivered her first policy address on 11 October. The Institute welcomed the government’s initiative of using tax measures as a tool to boost Hong Kong’s international competitiveness.


After several years of proposing a special lower tax rate for small- and medium-sized enterprises (SMEs) in its budget submissions, the Institute is pleased to see that the proposed two-tier profits tax system supporting SMEs is even more competitive than it had campaigned for. The tax regime will allow for the first HK$2 million of profits of enterprises to be taxed at a reduced rate of 8.25 percent. The Institute believes that the new tax rate would improve Hong Kong’s attractiveness to start-ups and small business operators.

The Chief Executive proposed a special measure that only one enterprise nominated by each business group be eligible for the reduced rate to address potential abuse. While the Institute welcomes this measure, it urges for a clear definition of “business group.”

On the proposed tax deduction for research and development (R&D), the deductions are more generous than the Institute anticipated. The Institute has been advocating “super deductions” for R&D expenditure for many years, acknowledging that R&D is essential to boosting the development of innovation and technology sectors.

Currently the incentives for R&D are too limited and inflexible, which makes it difficult for Hong Kong to compete internationally. The current proposed tax deduction goes some way to remedy this, says the Institute.



Hong Kong Institute of Certified Public Accountants settles regulatory proceedings involving a firm and a certified public accountant (practicing)

The Hong Kong Institute of Certified Public Accountants has settled regulatory proceedings concerning alleged non-compliance of its professional standards involving PricewaterhouseCoopers (PwC) and a certified public accountant (practising), Chan Wai Hong, Michael.

The complaint concerns the accounting treatment of a shortfall arising from the disposal of a company’s subsidiary to its controlling shareholder in unaudited pro forma financial information (UPFI) set out in a 2013 VSD circular of a Hong Kong listed entity. The shortfall arose because the consideration for the disposal of the subsidiary was less than its carrying value. The entity reported the loss in equity as part of the shareholders’ reserves, relying on Hong Kong Accounting Standard (HKAS 1) which permitted transactions with shareholders in their capacity as shareholders to be reflected in equity.

PwC and Chan were the reporting accountants of the UPFI and had issued an unqualified opinion on the UPFI.

The Institute is of the opinion that Hong Kong Financial Reporting Standard 10 (HKFRS 10) required the entity to reflect the loss in the income statement. The Institute is also of the opinion that the documentation in the working papers relating to this judgmental issue was inadequate.


The Council of the Institute has agreed with PwC and Chan that:

1. The Institute will cease regulatory proceedings against PwC and Chan;

2. A formal letter of disapproval will be issued to PwC and Chan by the Institute; and

3. PwC and Chan jointly make a contribution to the Institute’s costs in the amount of HK$108,000.

The Council considers that dealing with the matter by way of a disapproval letter will achieve an appropriate resolution without incurring additional expenses and tying up resources in disciplinary proceedings.


Disciplinary findings

Poon Wai Kit, CPA

Complaint: Poon has been convicted of an offence involving dishonesty. He also falsified or caused to be falsified certain documents.

Poon was convicted in the District Court in July 2016 of the offence of theft which he committed during his employment with two companies. As an accountant of the first company, Poon forged the managing director’s signature on the company’s cheques amounting to about HK$7 million and issued them to himself.

Later, Poon was employed by another company as a deputy financial manager. He deceived the company into paying him funds totalling about HK$5 million. Poon falsely claimed to the company that the funds were used to pay for purchases of goods which did not in fact occur. To cover up the embezzlement, Poon forged supplier invoices which also bore the company’s chops purportedly evidencing receipt of goods purchased.

After considering the information available, the Institute lodged complaints under section 34(1)(a)and 34(1)(a)(iii)(A) of the Professional Accountants Ordinance. Poon admitted the complaints against him.

Decisions and reasons: Poon was removed from the register of CPAs permanently with effect from 23 September 2017 and was ordered to pay costs of the disciplinary proceedings of HK$17,130. When making its decision, the Committee took into consideration the particulars in support of the complaints, Poon’s personal circumstances and his conduct throughout the proceedings.


So Kwok Keung, Keith, CPA (practising)

Complaint: Failure or neglect to observe, maintain or otherwise apply (i) Hong Kong Standard on Auditing (HKSA) 230 Audit Documentation; and (ii) HKSA 500 Audit Evidence.

So is a practising director of East Asia Sentinel Limited (Practice). While carrying out a practice review, the reviewer found significant deficiencies in relation to the Practice’s audit of a Hong Kong listed company in respect of the valuation of convertible bonds. So was the engagement director who signed the auditor’s report and therefore responsible for the quality of the audit engagement.

Decisions and reasons: So was reprimanded and ordered to pay a penalty of HK$60,000 and costs of disciplinary proceedings of HK$33,004. When making its decision, the Disciplinary Committee took into consideration the particulars in support of the complaint, the parties’ submissions, the conduct of So throughout the proceedings and his personal circumstances.


Tse Lap Fu, Lawrence, CPA (practising)

Complaint: Failure or neglect to observe, maintain or otherwise apply professional standards issued by the Institute and being guilty of professional misconduct.

Tse was the sole proprietor of a CPA firm. The Institute enquired into a complaint about improper audits carried out by the firm and found deficiencies in its audits of the financial statements of five private companies. The deficiencies related to the performance and documentation of audit procedures carried out on related party transactions, deferred tax, inventory and evaluation of whether the financial statements were prepared in accordance with the applicable financial reporting framework. In addition, Tse’s firm acted as auditor of one of the companies when it had a close business relationship with that company.

Decisions and reasons: Tse was reprimanded. In addition, the practising certificate issued to Tse was ordered to be cancelled on 15 October 2017 and a practising certificate shall not be issued to him for six months. Further, Tse shall pay a penalty of HK$50,000 and costs of the disciplinary proceedings of HK$123,108. The committee took into consideration the significance of the multiple breaches involving more than one company, and the need for a strong message about the seriousness of an auditor’s breach of independence. On the other hand, the committee took account of Tse’s personal circumstances and his early admission of the complaints.


Resolution by Agreement

Lee Ping Kai, CPA (practising)

Complaint: Failure or neglect to observe, maintain or otherwise apply professional standards.

Lee was a director of a corporate practice. The practice was appointed as auditor of a Hong Kong listed group and Lee was the engagement director. The practice issued an unmodified auditor’s opinion on the group’s financial statements for the year ended 31 December 2014 and an unqualified review opinion on the group’s interim financial statements for the six months ended 30 June 2015.

The 2014 annual financial statements and 2015 interim financial statements misstated the earnings per share of the holding company. The misstatements were caused by wrongly calculated adjustments made for the company’s share consolidation and rights issue. The errors represented a breach of Hong Kong Accounting Standard 33 Earnings Per Share. The company issued announcements in August and December 2015 about the misstated earnings per share disclosed in the financial statements.

Regulatory action: In lieu of further proceedings, the Council concluded the following action should resolve the complaint:

1. Lee acknowledges the facts of the case and his non-compliance with the relevant professional standards;

2. He be reprimanded; and

3. He pays an administrative penalty of HK$30,000 and costs of HK$10,000.


Details of disciplinary findings and guidelines for Resolutions by Agreement are available at the Institute’s website: