Further Accounting Reform: the Financial Reporting Council (Amendment) Bill 2021

On 16 July 2021, the Financial Reporting Council (Amendment) Bill 2021 (the “Bill“) was gazetted. The Bill aims to further develop the Financial Reporting Council (“FRC“) into a full-fledged independent regulatory and oversight body for the accounting profession. It seeks to amend the Financial Reporting Council Ordinance (Cap. 588) (“FRCO“) to, inter alia, enhance the independence of the regulatory regime for accounting professionals; to regulate accounting professionals through registration, issuing practising certificates, inspection, investigation and disciplinary sanction; to rename the FRC; and to provide for the new functions of the FRC[1].


At present, the Hong Kong Institute of Certified Public Accountants (the “HKICPA“) is vested with certain regulatory powers in respect of certified public accountants (“CPAs“) and practice units[2] which include among other things, issuance of practising certificates, registration, investigation and discipline over the same under the Professional Accountants Ordinance (Cap. 50) (“PAO“); whereas the FRC is responsible for regulating auditors of Public Interest Entities (“PIE“)[3] and exercises powers of inspection, investigation and discipline over PIE auditors and their responsible persons in relation to their engagements for listed entitles under the FRCO.

The regulation of PIE auditors by the FRC was pursuant to a reform proposal introduced in 2018 to transfer such powers from the HKICPA to the FRC. The Government has been taking a step-by-step approach to achieve regulatory reform and indicated that further reform would be on the way. Against such background, the Bill has been introduced to transfer further powers currently exercised by the HKICPA to the FRC.

The Legislative Proposal

The key aspects of the proposal are summarised as follows:

  • Renaming of the FRC

In view of the expansion of the scope of regulation beyond PIE auditors to cover all CPAs, the FRC will be renamed as the “Accounting and Financial Reporting Council” (“AFRC“) to more fully reflect its roles and functions after the reform[4]. Similarly, the current FRCO will be renamed as “Accounting and Financial Reporting Council Ordinance” (“AFRCO“)[5].

  • Issue of practising certificates and registration

The Bill seeks to add a new Part 2A[6] to the FRCO which provides for the AFRC to exercise its new functions in relation to the issue of practising certificates to CPAs[7] and registration of CPA firms[8] and corporate practices[9]. It also provides for the AFRC to establish and maintain a register of CPAs (practising), CPA firms and corporate practices (i.e. practice units)[10].

In connection with the above functions, the proposed new Part 2A provides for the related offences which include pretending to be or practising as CPAs (practising)[11]; signing audit reports without practising certificates[12]; and advertising or representing as being qualified to practise[13] etc.

It should be noted that the HKICPA will continue to be responsible for registration of CPAs and to administer professional examinations, qualification and continuing professional development programmes, and the mutual or recognition agreements with accountancy bodies of other jurisdictions in relation to registration of CPAs in Hong Kong, subject to the oversight of the AFRC.

  • Inspection, investigation and discipline

Pursuant to a proposed new Part 3AA[14] of the FRCO, the AFRC may appoint CPA inspectors to carry out inspections in relation to practice units for the purpose of determining whether a unit has observed, maintained or applied a professional standard. It also provides for the powers of the AFRC to conduct investigation in relation to professional persons[15]. In addition, the AFRC will be vested with disciplinary powers under the Bill in respect of professional persons. If a professional person commits any misconduct under the proposed new section 37AA of the AFRCO, the AFRC could then impose sanctions under the proposed new section 37CA of the AFRCO[16]. Sanctions include the following:

  • public or private reprimand;
  • a pecuniary penalty to the AFRC in a sum not exceeding HK$500,000;
  • revocation or suspension of a person’s registration for a period of time;
  • cancellation of practising certificate; and
  • non-issuance of practising certificate on a permanent basis or for a period of time.

It is worth noting that the scope of disciplinary powers on professional persons and the type and level of sanctions over them in case of non-compliance under the proposed regime will follow closely and remain comparable to those currently provided in the PAO[17].

  • Oversight of the HKICPA’s statutory functions

The AFRC would oversee the HKICPA’s performance of the following functions[18]:

  • conducting examinations to ascertain whether persons are qualified for registration as CPAs, and dealing with applications and other matters relating to the registration of CPAs;
  • arranging with accountancy bodies in places outside Hong Kong for the mutual or reciprocal recognition of accountants;
  • setting continuing professional development requirements for CPAs;
  • issuing or specifying standards on professional ethics, and accounting, auditing and assurance practices, for CPAs; and
  • providing training for qualifying for registration as, and the continuing professional development of, CPAs.
  • Review and appeal mechanism

At present, an independent review tribunal, the Public Interest Entities Auditors Review Tribunal (the “Tribunal“), has been established under section 37N of the FRCO with jurisdiction to review the HKICPA’s decisions in relation to the registration of local PIE auditors and the FRC’s decisions regarding the recognition of overseas PIE auditors and discipline of all PIE auditors. The Bill seeks to expand the Tribunal’s jurisdiction to review all decisions in relation to the issue of practising certificates, registration of CPA firms and corporate practices and disciplinary actions against CPAs and practice units made by the AFRC. In light of the expanding functions of the Tribunal, it is proposed to be named as “Accounting and Financial Reporting Review Tribunal”[19].

Under the current FRCO, if a party to a review is dissatisfied with a determination of the review made by the Tribunal, the party may appeal to the Court of Appeal and leave is required for such an appeal[20]. The Bill does not seek to amend such an appeal mechanism and thus the position remains the same under the proposed AFRCO.

  • A proposed new advisory committee

The Bill seeks to provide for the establishment of a new advisory committee to advise the AFRC on matters of policy regarding any of its regulatory objectives and functions.

  • Transitional arrangements

The Bill introduces a new provision to provide for the power of the Secretary for Financial Services and the Treasury to make transitional and saving provisions consequent on the enactment of the AFRCO by way of regulation for matters including pending applications for registration of practice units and the issue of practising certificates before the HKICPA under the PAO. Such regulation would be subsidiary legislation subject to scrutiny by way of negative vetting of the Legislative Council.

It is proposed that all registration applications approved by the HKICPA before the commencement of the new regime will remain valid, whereas outstanding applications will be transferred to the AFRC for processing upon commencement of the new regime. For ongoing practice reviews, investigations and disciplinary cases of the HKICPA which have not been completed on the commencement date of the new regime will continue to be conducted under the PAO mechanism. The result of such practice reviews or investigation under the transitional arrangement will then be referred to the AFRC for follow-up action[21].

Legislative Timetable 

The Bill received its First Reading at the Legislative Council meeting on 21 July 2021 and a Bills Committee was formed on 23 July 2021. At the time of writing, the Second Reading debate of the Bill has not resumed and will take place on a date to be notified.

Potential reduction in compliance costs and independent regulation of accountants

According to the Government, one of the justifications for the Bill is to ensure more efficient use of resources and reduce compliance burden as presently, individual practice units and CPAs with both PIE engagements and all other engagements would be subject to separate inspections by the FRC and the HKICPA, which may lead to extra compliance burden for the entities concerned. However, on the other hand, there are also concerns about the potential increase in compliance costs and burden for non-PIE auditors and CPAs under the proposed regime.

The Government also suggests that the reform would make our regulatory regime of the accounting profession more in line with the international standard and practice by vesting the regulatory powers with a regulatory body independent from the trade to ensure impartiality, and to reinforce our status as an international financial centre and business hub. In this regard, the HKICPA accepts that a common feature found in other jurisdictions is independent regulation of PIE auditors, though there is no one approach as such. According to the HKICPA, regulatory models for the whole of the accounting profession differs between jurisdictions and such differences reflect the different natures and structures of the profession across different jurisdictions.


As mentioned above, the Bill is a more extensive reform of the regulation of the accounting profession as a whole than the previous one which was concerned with PIE auditors only and would involve a wider range of stakeholders. As with any other reforms, in light of the various concerns of the stakeholders, it is believed that more extensive consultations would likely enhance the effectiveness of the reform.

[1] p. C4019 of the Bill.

[2] A practice unit means (a) a firm of CPA (practicing); (b) a CPA (practising); or (c) a corporate practice under section 2 of the Professional Accountants Ordinance (Cap. 50).

[3] Public Interest Entity means (a) a listed corporation (equity); or (b) a listed collective investment scheme (Section 3(1) of the Financial Reporting Council Ordinance (Cap. 588)).

[4] Clause 10 of the Bill.

[5] Clause 4 of the Bill.

[6] Clause 19 of the Bill.

[7] Division 1 of the new Part 2A (Clause 19 of the Bill).

[8] Division 2 of the new Part 2A (Clause 19 of the Bill).

[9] Division 3 of the new Part 2A (Clause 19 of the Bill); the AFRC will also be responsible for the registration of PIE auditors (Clause 20 of the Bill), whereas CPAs will continue to be dealt with by the HKICPA.

[10] Division 4 of the new Part 2A (Clause 19 of the Bill).

[11] Division 5 of the new Part 2A.

[12] Ibid.

[13] Ibid.

[14] Clause 42 of the Bill.

[15] “Professional person” is proposed to mean (a) a CPA; or (a) practice unit under Clause 5(21) of the Bill.

[16] Clause 64 of the Bill.

[17] Section 35 of the Professional Accountants Ordinance (Cap. 50).

[18] Clause 12(4) of the Bill.

[19] Clause 75(2) of the Bill.

[20] Sections 37ZF and 37ZG of the FRCO.

[21] Legislative Council Brief dated 14 July 2021, paragraphs 17-19

23 September 2021
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