Law Fei Shing v. The Disciplinary Committee of the Hong Kong Institute of Certified Public Accountants and Another

HCAL 750/2018

[2018] HKCFI 2592

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTITUTIONAL AND ADMINISTRATIVE LAW LIST NO 750 OF 2018

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Before:  Hon Chow J in Court

Date of Hearing:  15 August 2018

Date of Judgment: 26 November 2018

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J U D G M E N T

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INTRODUCTION

1.The principal issue which arises for determination in this case is whether the Applicant, a certified public account, who is the subject of on-going disciplinary proceedings brought against him arising out of his audit of the accounts of a company, ought to be given access to information and documents relating to the actions (if any) which The Hong Kong Institute of Certified Public Accounts (“the Institute”) have, or may have, taken against the previous auditor of that company.

BASIC FACTS

2.The Applicant was the auditor of Chong Luen Hing Garments Limited (“CLH”) for the financial years ended 31 March 2009, 2010 and 2011:

(1) In his audit report on the financial statements of CLH for the year ended 31 March 2009 (“the 2009 Audited Report”), the Applicant expressed a qualified opinion with respect to, inter alia, the underlying value of CLH’s investment in a wholly owned subsidiary (“the Subsidiary”) in the PRC.  The basis of the qualification was stated to be that “in the absence of audited accounts of the subsidiary, we are unable to ascertain the underlying value of the investment although an aggregate impairment loss of the investment amounting to HK$10,875,000 have been provided”.  In the relevant financial statements, the carrying value of CLH’s interest in the Subsidiary was stated to be HK$4,125,000, being the value at cost of HK$15,000,000 less accumulated provision for impairment loss of HK$10,875,000.

(2) The Applicant did not make any similar qualification in respect of the value of the Subsidiary in his audited reports on the financial statements of CLH for the years ended 31 March 2010 and 31 March 2011 (“the 2010 Audited Report” and “the 2011 Audited Report” respectively), although the same impairment provision was made in the financial statements –

(a) The relevant audit working papers for the year ended 31 March 2010 stated as follows –

“For the impairment provision, due to the absence of information, we can’t do any valuation test of the investment in the PRC subsidiary. Thus, the recoverable amount of the impairment cannot be determined. Also, [the Subsidiary] keeps supplying goods to CLH continuously. Moreover, as per the director’s opinion, the amount of impairment provision made by the former auditor should be remained. Therefore, we do not make any further impairment of the [above] figure.”

(b) The relevant audit working papers for the year ended 31 March 2011 stated as follows –

“For the impairment provision, due to the absence of information, we can’t do any valuation test of the investment in the PRC subsidiary. Also, the recoverable amount of the impairment cannot be determined. As the director’s opinion, we follow the amount of impairment provision made by the former auditor.”

3.On 5 September 2012, Mr Lee Kwong On (“Mr Lee”), a former director and minority shareholder of CLH, lodged a complaint against the Applicant with the Institute (being the 2^nd Putative Respondent in these proceedings), alleging that the audited accounts of CLH for 2009, 2010 and 2011 were irregular and contained material misstatements.  Enclosed with Mr Lee’s letter to the Institute was a letter dated 26 July 2012 written by Mr Lee’s former solicitors, Michael Cheuk, Wong & Kee, to the Applicant in which it was alleged, inter alia, that the Subsidiary was operating prosperously, and the provision for the impairment loss of the investment in the Subsidiary was unjustified and unsustainable.

4.Thereafter, the Institute conducted an investigation into Mr Lee’s complaint against the Applicant, and invited submissions from him:

(1) In the Institute’s letter to the Applicant dated 8 October 2012, the Applicant was asked to explain, inter alia, “the basis of the impairment provision, and [the Applicant’s] concurrence with the same, for the years ended 31 March 2010 and 2011 in which no qualifications were made in [the Applicant’s] audit report regarding the value of the investment”.

(2) In the reply letter from the Applicant’s former solicitors, Yung & Au, to the Institute dated 5 February 2013, it was stated that –

“As mentioned above, the impairment provision of HK$10,850,000 with respect to CLH’s interests in [the Subsidiary] was made by the Former Auditor, with the authority and approval by, amongst other, the Complainant.

Similar to the problem faced by the Former Auditor…, our client had not been provided with [the Subsidiary’s] audited accounts, management accounts or other relevant information in the course of his audit of CLH’s financial statements for the years ended 31 March 2009 to 31 March 2011.

In the absence of such accounts and information (including financial cashflow forecasts) and any contrary view expressed by the management of CLH at the material times (including the Complainant), our client was (and still is) of the opinion that the recoverable amount cannot be determined and there was not any basis to reverse the impairment provision at issue pursuant to paragraphs 109 to 116 of Hong Kong Accounting Standard 36...

Our client does accept, however, that his opinions (or qualifications to or basis of such opinions) could have been more clearly disclosed in Note 2 to CLH’s audited financial statements for the years ended 31 March 2010 to 31 March 2011 (‘Basis of preparation of accounting policies – Impairment of assets’) and in similar note to the audited financial statements for the year ended 31 March 2009.”

(3) In paragraph (B)3 of the Institute’s letter to Yung & Au dated 20 June 2013, the Institute highlighted the following matters and requested the Applicant to provide further representations on them –

“The ‘Investment in a subsidiary’ was material to the financial statements. Therefore, the fact that impairment provisions were made in the audited financial statements of earlier years does not absolve the responsibility of your client as the auditor to make an annual assessment of management’s valuation of the investment. As the evidence shows that your client did not do so in its audits of CLH in 2011, 2010 and 2009, we consider that [the Applicant] failed to:

(i) obtain sufficient audit evidence in accordance with Hong Kong Standard on Auditing 500; and/or

(ii) provide a sufficient and appropriate record of the basis for the auditor’s report under Hong Kong Standard on Auditing 230 ‘Audit Documentation’ to support its opinion that the management had properly assessed the impairment of the investment in [the Subsidiary] in accordance with the requirements of HKSA 36 or [Small and Medium-sized Entity Financial Reporting Framework]; and

(iii) qualify the audit opinion in accordance with Hong Kong Standard on Auditing 705 (paragraphs 7-10) for the 2009 audited financial statements; and with Hong Kong Standard on Auditing 701 (paragraphs 16-19) for 2010 and 2011 audited financial statements, for the scope limitation arising from the non-availability of the financial statements of [the Subsidiary] for assessment of the impairment provision made by management.”

(4) In the penultimate paragraph of the Institute’s said letter dated 20 June 2013, the Institute also stated that it would consider appropriate action to be taken against CLH’s former auditor (“the Former Auditor”) who audited the financial statements of CLH for the years ended 31 March 2006, 2007 and 2008 (“the 2006 Audited Report”, “the 2007 Audited Report” and “the 2008 Audited Report” respectively).

(5) In the response letter from Yung & Au dated 12 July 2013, it was stated that –

“2.1 As regards paragraphs 3(i) and (ii), section (B) of your letter, contrary to the suggestions made therein, our client had considered the recoverable amount in CLH’s investment in [the Subsidiary] (and hence the appropriate value of impairment loss) during pre-audit meetings and in the course of the audit, despite the unavailability of [the Subsidiary’s] accounts.

2.2 In considering the recoverable amount in CLH’s investment in [the Subsidiary], our client had taken into account the fact that [the Subsidiary] was a going concern, with its factory under normal operation mode, producing goods over HK$100 million in value each year. This had suggested to our client that [the Subsidiary’s] financial status was sound and there appeared to our client no basis to adjust the impairment loss, in the absence of [the Subsidiary’s] accounts and other indicators.

2.3 As for paragraph 3(iii), section (B) of your letter, qualifications concerning the impairment were in fact made in the auditor’s report for 2009 (i.e. the first auditor’s report prepared by our client for CLH).  For subsequent years (2010 and 2011), as our client had accumulated a greater understanding of CLH’s affairs and in view of the matters set out in paragraph 2.2 above, similar qualifications were removed.”

(6) By a further letter to Yung & Au dated 28 January 2014, the Institute informed the Applicant, inter alia, that (i) the Professional Conduct Committee of the Institute considered that the Applicant had failed to comply with a number of professional standards issued by the Institute during his audit of the financial statements of CLH for each of the financial years ended 31 March 2010 and 2011, (ii) the Professional Conduct Committee had resolved to recommend to the Council of the Institute that the matter be referred to the Disciplinary Panels, and (iii) a formal complaint had been proposed against the Applicant.

5.By a letter dated 6 February 2014 (“the Complaint Letter”), the Registrar submitted a complaint against the Applicant to the Council.  The Council subsequently referred the complaint to the Disciplinary Panels, pursuant to Section 34(1A) of the Professional Accountants Ordinance, Cap 50 (“the Ordinance”).  In the Complaint Letter, seven complaints were set out against the Applicant, of which the “Third Complaint” is relevant for the present purpose and states as follows –

“Section 34(1)(a)(vi) applies to the [Applicant] in that he failed or neglected to observe, maintain or otherwise apply a professional standard, namely Hong Kong Standard of Auditing 701 Modifications to the Independent Auditor’s Report (‘HKSA701’), as a result of his failure to qualify his opinion concerning a scope limitation in verifying the propriety of an accumulated provision for impairment loss of HK$10,875,000 made against an investment in the 2010 and 2011 Financial Statements.”

6.Mention has also been made by the Applicant of the Seventh Complaint in these proceedings.  However, the Seventh Compliant is a general one which does not add anything of substance to the Third Complaint, and does not require separate consideration in this judgment.

7.The Registrar, as the “Complainant”, submitted the Complainant’s Case to the Disciplinary Committee (being the 1^st Putative Respondent in these proceedings) on or about 24 October 2014 pursuant to Rule 18 of the Disciplinary Committee Proceedings Rules.  Substantial delay to the progress of the disciplinary proceedings against the Applicant occurred as a result of, amongst other things, an application by the Applicant made on 10 October 2014 for leave to apply for judicial review of the alleged decision of the Council to refer the complaint made by Mr Lee against the Applicant to the Disciplinary Panels.  The application for leave to apply for judicial review was dismissed by Zervos J (as he then was) on 2 February 2015 on the ground that it was “both out of time and without merit” (see paragraph 59 of Zervos J’s Decision in HCAL 132/2014).  The Applicant’s application for an extension of time to appeal against the decision of Zervos J was dismissed by the Court of Appeal on 21 April 2016 in HCMP 748/2015.  His further applications for leave to appeal against the decision of the Court of Appeal were dismissed by (i) the Court of Appeal on 20 October 2016, and (ii) the Appeal Committee of the Court of Final Appeal on 29 June 2017 pursuant to Rule 7 of the Hong Kong Court of Final Appeal Rules in FAMV 50/2016.  The disciplinary proceedings against the Applicant resumed thereafter.

8.On 30 January 2018, the Applicant, through another firm of solicitors, Lau, Chan, & Ko, wrote to the Disciplinary Committee stating that he was entitled to know “what action [against the Former Auditor], if any, has been taken and why, which is for him to consider his position and to prepare his case for submitting to the Committee”.

9.By a reply letter to Lau, Chan & Ko dated 2 February 2018, the Disciplinary Committee stated that the Institute’s action against the Former Auditor (referred to as “other practitioners”) was not “pertinent to the Complaint”.  Pausing here, I should mention that this statement was made in context of considering the Applicant’s application to postpone the filing of the Respondent’s Case pending provision of the information referred to in Lau, Chan & Ko’s said letter of 30 January 2018.  The Disciplinary Committee considered that the proceedings should not be further delayed, but permitted the Applicant to file the Respondent’s Case no later than 21 February 2018.

10.In the response letter to the Disciplinary Committee dated 12 February 2018, Yung & Au (who resumed acting for the Application) stated that “our client is making request for disclosure of additional information and documents which he believes would assist his case”, and requested for an extension of time to file the Respondent’s Case to 5 April 2018.

11.By a letter of the same date (ie 12 February 2018) to the Council, Yung & Au made, on behalf of the Applicant, a wide ranging request for information and documents, as follows –

“In your letter dated 20 June 2013, the HKICPA indicated that it will consider the appropriate action to be taken in respect of the audited financial statements of CLH for the years ended 31 March 2006, 2007 and 2008 prepared by another firm of accountants named So & Ho. We are instructed to request for information and documents in relation to any action taken against So & Ho in respect of the aforesaid matters, including but not limited to:-

1. All papers such as any agenda or minutes showing discussions among Council members as to whether any investigation or inquiry should be taken;

2. All papers such as letters or reports showing any actions or further actions taken;

3. All papers such as letters or reports showing any results or decisions of such actions taken; and

4. In the event that no action had been taken, all papers showing the discussions and the reasons why no action or further action was required.

Our client believes that this is relevant to his case in the disciplinary proceedings no. D-12-0734-C against him and we urge the Council to produce such information and documents to our client within the next 21 days.”

12.The Applicant’s request for disclosure of information and documents was rejected by the Institute by a letter dated 27 February 2018 from its solicitors, Reed Smith Richards Butler (“RSRB”), on the basis that –

“[t]he actions of the Former Auditors and the Institute are irrelevant to the present proceedings. In particular, the central issue of whether or not your client has (among other things) failed or neglected to observe, maintain or otherwise apply the relevant professional standards is not dependent upon the action of the Former Auditors.”

13.There was some further exchange of letters between Yung & Au, RSRB and the Disciplinary Committee, the contents of which it is not necessary to summarise in this judgment.  The Applicant eventually filed the “Respondent’s Case” (substantive) in the disciplinary proceedings on or about 16 April 2018.

14.On 27 April 2018, the Applicant made the present application for judicial review of:

(1) the decision of the Disciplinary Committee contained in the letter of 2 February 2018 to proceed with the disciplinary proceedings against the Applicant before he was informed of the Institute’s action (if any) against other practitioners in respect of (allegedly) the same complaint; and

(2) the continuing decision of the Institute by which it refuses to disclose to the Applicant about the Institute’s action (if any) against other practitioners in respect of (allegedly) the same complaint.

15.The ground of judicial review raised in the Applicant’s Form 86 is “procedural unfairness” arising from the failure to disclose the information and documents sought in relation to the actions (if any) taken by the Institute against the Former Auditor.

16.On 2 May 2018, the court directed an oral hearing to determine the application for leave to apply for judicial review. At the oral hearing on 15 August 2018, the parties agreed that the hearing should be treated as a rolled-up hearing to consider both the question of leave and the merit of the substantive application.

DISCUSSION

17.In paragraph 5 of the Skeleton Argument of Mr Philip Dykes, SC for the Applicant dated 7 August 2018, the following summary of the ground of judicial review is given –

“The Decisions violate the Applicant’s right to a fair hearing, enshrined in Article 10 of the Hong Kong Bill of Rights (s.8 of Cap.383, ‘BOR’) and at common law. They do this by denying him access to information that is relevant to establishing his defence, and/or carrying on with proceedings in circumstances where his right to a fair trial has been put in jeopardy.”

18.It is not with disrespect that I do not propose to examine the many authorities cited by Mr Dykes relating to the right to a fair hearing, whether under the Hong Kong Bill of Rights or at common law, because it is not in dispute that the Applicant is entitled to a fair hearing in the current disciplinary proceedings against him.  The important question in the present case is whether the Applicant has been, or will be, deprived of a fair hearing by the denial of the information and documents sought by him.

19.In my view, the intended application for judicial review is not reasonably arguable, for the following reasons.  First, it is well established that the court does not, generally speaking, entertain an application for judicial review of a decision which is merely “intermediate” or “procedural” in nature, or which does not give rise to any substantive consequence or is not a decision of a “decisive nature”.  The rationale for this principle was explained by the Court of Final Appeal in Financial Secretary v Wong (2003) 6 HKCFAR 476:

(1) At paragraph 13 of the judgment of the Court of Final Appeal, Bokhary PJ stated the following –

“The courts’ judicial review jurisdiction is of a supervisory nature. This extremely important jurisdiction is not meant for the purpose of micro-managing the activities of subordinate tribunals or administrative decision-makers. It should hardly ever be exercised to review decisions that go only to procedure rather than to the end result. I say ‘hardly ever’ rather than ‘never’ because there can be wholly exceptional cases calling for special treatment… If the Tribunal had been properly seised of an application for costs, the High Court's proper course would have been to leave the Tribunal to proceed to a decision on the end result and then, if the circumstances eventually so warranted, judicially review that end result. Quite apart from anything else, it often happens that the effect of questionable decisions made at an intermediate stage of a process are dissipated or overtaken by subsequent developments and turn out to have little or no impact by the time the final stage is reached.”

(2) At paragraphs 93 to 95 of the judgment of the Court of Final Appeal, Litton PJ further stated as follows –

“93 Turning more specifically to the scope of judicial review, it is, broadly speaking, the means by which judicial control of administrative action is exercised. It is not every decision by a decision maker which is susceptible to review: Were it otherwise the functioning of the executive arm of government and of statutory bodies and tribunals would be ensnared in multiple applications in the courts. As put by the authors of Administrative Law: Wade and Forsyth (8^th ed.) p.600-601:

‘As the law has developed, certiorari and prohibition have become general remedies which may be granted in respect of any decisive exercise of discretion by an authority having public functions ...’

94 The emphasis here is on the decisive nature of the exercise of power…

95 As Mason CJ said in Australian Broadcasting Tribunal v. Bond (1990) 170 CLR 321 at 337, an essential quality of a reviewable decision is that it is a substantive determination: Thus

‘the refusal by a decision-maker of an adjournment at an administrative hearing would not constitute a reviewable decision, being a procedural matter not resolving a substantive issue and lacking the quality of finality.’”

20.In the present case, the two decisions of the Disciplinary Committee and Institute respectively are intermediate or procedural in nature.  There seems to me to be no good, or exceptional, reason why the court should intervene in the disciplinary proceedings at this stage, instead of allowing those proceedings to take their natural course to their conclusion.

21.Second, the actions (if any) which have taken by the Institute against the Former Auditor are irrelevant to the Third Complaint against the Applicant.  In this regard, it is important to note that the Third Complaint is not about the amount, or correctness, of the impairment provision of HK$10,875,000 made in relation to the value of CLH’s investment in the Subsidiary as stated in the financial statements of CLH for the years ended 31 March 2010 and 2011.  It is about the Applicant’s failure to qualify his audit opinion in respect of the value of CLH’s investment in the Subsidiary as stated in those financial statements as required by paragraph 18 of Hong Kong Standard on Auditing 701, which states as follows –

“Where there is a limitation on the scope of the auditor’s work that requires expression of a qualified opinion or a disclaimer of opinion, the auditor’s report should describe the limitation and indicate the possible adjustments to the financial statements that might have been determined to be necessary had the limitation not existed.”

22.Whether the Applicant ought to have expressed a qualified opinion in respect of the value of CLH’s investment in the Subsidiary due to scope limitation in accordance with paragraph 18 of Hong Kong Standard on Auditing 701 is a matter which should be determined by reference to the information and materials which were available to the Applicant (including matters which the Applicant ought reasonably to have found out or discovered by the exercise of due diligence) at the time when he carried out the audit of CLH’s financial statements for the years ended 31 March 2010 and 2011 and the relevant professional standard in force at that time.  It does not depend on whether the Former Auditor, rightly or wrongly, failed to express any qualified opinion in respect of the value of CLH’s investment in the Subsidiary in the 2006, 2007 or 2008 Audited Reports, still less on what actions (if any) have been taken by the Institute against the Former Auditor in respect of those audited reports after the event.  Even if, for the sake of argument, the Former Auditor ought to have expressed a relevant qualified opinion in their audited reports and the Institute decided, erroneously, not to take action against the Former Auditor, it cannot sensibly be argued that, in order to ensure consistency of treatment, the Institute should likewise take no action against the Applicant.  The correct response should, in my view, be that the Institute ought to take action against the Former Auditor, but that is a separate matter.  I pause to observe that, as a matter of fact, the Former Auditor did express a relevant qualified opinion in the 2007 and 2008 Audited Report (but not in the 2006 Audited Report) in relation to the value of CLH’s investment in the Subsidiary due to the absence of the audited accounts of the Subsidiary. 

23.To the extent that it is suggested that the Institute’s actions against the Former Auditor are, or may be, relevant to the sanction which may be imposed on the Applicant should the Third Complaint against him be established eventually, that is a matter which can and should be addressed after the issue of breach or liability has been determined by the Disciplinary Committee.

24.Third, it is argued on behalf of the Applicant that the Institute has had access, and the Disciplinary Committee appears to have had access, to information that is not available to the Applicant, and the principle of “equality of arms” requires that the Applicant be given access to the same information.  In my view:

(1) In so far as it is said that the Institute has access to information on the actions (if any) that it has taken against the Former Auditor, for reasons mentioned above, such information is irrelevant to the proceedings against the Applicant at this stage.

(2) In so far it is alleged that the Disciplinary Committed appears to have had access to such information, the Disciplinary Committee has, through leading counsel, confirmed that it does not have access to the information in question.  In this regard, it is relevant that the Disciplinary Committee (comprising 5 members, of whom 3 are lay persons and 2 are certified public accountants) is constituted pursuant to Section 33(3) of the Ordinance specifically for the purpose of the present disciplinary proceedings against the Applicant, and is independent of the Council (see Section 33(2) of the Ordinance).  The Institute’s solicitors (RSRB) has also confirmed, in a letter to Yung & Au dated 19 March 2018, that in accordance with the usual practice, all materials that are placed before the Disciplinary Committee (including any statements that may have been made affecting the Applicant) will be copied or otherwise made available to him.  Further, as pointed out by Miss Sara Tong (for the Institute), disciplinary proceedings which have been commenced against any accountant are matters of public record, with the following information being published on the Institute’s website: (i) a list of all disciplinary proceedings in progress, (ii) a hearing schedule, setting out the dates of all substantive hearings scheduled to be conducted by Disciplinary Committees, which are held in public unless otherwise directed (see Rule 26(2) of Disciplinary Committee Proceedings Rules), and (iii) all disciplinary decisions where orders have been made against any respondent for the past 5 years.  Overall, there is no proper or sufficient basis for the allegation that the Disciplinary Committee is privy to relevant information which is not available to the Applicant.

25.In all, the intended application for judicial review is not reasonably arguable, and has no realistic prospect of success.

DISPOSITION

26.For the foregoing reasons, the application for leave to apply for judicial review is dismissed.

27.The principles governing an award of costs in an unsuccessful application for leave to apply for judicial review are well settled (see Leung Kwok Hung v President of the Legislative Council (No 2) (2014) 17 HKCFAR 841, at paragraph 17).  In the circumstances of this case, I consider that the Institute should be entitled to be paid its costs by the Applicant, because:

(1) The present application clearly lacks any substantive merits.

(2) The Applicant is pursuing this application solely to advance his personal interest, and not for any public interest reasons.

(3) The Institute attended the hearing at the invitation of the court, and has provided substantial and helpful assistance to the court.

(4) The Applicant has, effectively, had a full hearing on the merits.

28.In so far as the costs of the Disciplinary Committee are concerned, the following additional considerations are relevant:

(1) A statutory tribunal whose decision is the subject of challenge in an application for judicial review should normally adopt a neutral position.

(2) The Disciplinary Committee’s Senior Counsel in fact adopted a very limited role at the hearing.

(3) The only substantive matter raised in Senior Counsel’s Skeleton Argument dated 13 August 2018 is to confirm the Institute’s case that the Disciplinary Committee did not have access to the information now sought by the Applicant.  This confirmation is relevant, but not critical, to the outcome of the present application.

(4) Such other matters as were raised by Senior Counsel at the hearing were relatively minor matters which would not have made any difference to the outcome of the present application.

(5) The general rule is that an unsuccessful applicant will normally not be required to pay more than one set of costs where there are two or more respondents appearing (see  Hong Kong Civil Procedure 2019, Vol 1, at paragraph 53/14/63).

29.While I am grateful to the assistance rendered by Senior Counsel for the Disciplinary Committee, in all the circumstances, I do not consider it justifiable to order the Applicant to pay the costs of the Disciplinary Committee in this case.

30.Accordingly, I make an order that the Applicant shall pay the costs of the Institute in this application, including the costs of the hearing on 15 August 2018, to be taxed if not agreed.  I make no order as to costs as between the Applicant and the Disciplinary Committee.

31.Lastly, it remains for me to thank counsel for their assistance rendered to the court.

Mr Philip Dykes, SC and Mr Tim Parker, instructed by Miao & Co, for the Applicant

Mr William Wong, SC instructed by Reynolds Porter Chamberlain, for the 1^st Putative Respondent

Ms Sara Tong, instructed by Reed Smith Richards Butler, for the 2^nd Putative Respondent