Ng Kay Lam v. The Registrar of the Hong Kong Institute of Certified Public Accountants
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CACV 28/2010 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF APPEAL CIVIL APPEAL NO. 28 OF 2010 (ON APPEAL FROM THE DECISIONS OF THE DISCIPLINARY ________________________ BETWEEN
________________________ Before: Hon Rogers VP, Le Pichon JA and Barma J in Court Date of Hearing: 17 November 2010 Date of Handing Down Judgment: 30 November 2010 ________________________
________________________ Hon Rogers VP: 1.I agree with the judgment of Le Pichon JA. Hon Le Pichon JA: 2.This is an appeal by the respondent from (1) a decision of the Disciplinary Committee (“the Committee”) of the Hong Kong Institute of Certified Public Accountants (“the Institute”) of 29 June 2009 finding the complaint that the respondent had breached section 34(1)(a)(vi) of the Professional Accountants Ordinance, Cap. 50 (“the Ordinance”) proved and (2) an order of 24 December 2009 that the respondent be reprimanded, pay a penalty of $50,000 to the Institute and costs in the amounts specified in the order. At the conclusion of the hearing judgment was reserved which we now give. Background 3.The facts are undisputed and can be summarised as follows. 4.The respondent is a certified public accountant practising as a sole proprietor under the name of K.L. Ng & Company (“the firm”). The firm carried out the audit of Linfoot (Asia Pacific) Ltd (“LAPL”) for the year ended the 31 December 2003. The audit report is dated 13 August 2004. 5.Until March 2005, the respondent had a part-time employee called Robert Lam (“Mr Lam”) who was a former colleague. Mr Lam did not work in the office and his involvement with the firm “was minimal”. 6.Mr Lam introduced LAPL to the firm in 1997. According to the respondent, he asked Mr Lam to prepare accounts and perform audit work on behalf of the firm for LAPL. Mr Lam was “always [his] primary point of contact” with LAPL. 7.Mr Lam became the company secretary of LAPL on 1 September 2003. At about the same time, the respondent agreed to Mr Lam’s request to allow LAPL to use the firm’s address as LAPL’s registered office. The Financial Statements for the year ended the 31 December 2003 were prepared by Mr Lam who also carried out the audit. Mr Lam did not receive any remuneration as company secretary. 8.At the material time Mr Lam also acted as LAPL’s accountant and according to him, it was out of friendship to one of the shareholders and directors and he had provided those services free of charge. 9.For the audit work performed, Mr Lam was remunerated by way of a percentage of the audit fee of the firm. 10.The chairman of LAPL made a complaint against the respondent to the effect that the respondent had failed or neglected to observe, maintain or otherwise apply paragraph 2 of Statement 1.203 (Professional Ethics - Integrity, Objectivity and Independence) in the audit of the financial statements of LAPL for the year ended the 31 December 2003. 11.At the material time LAPL was a small private company with no salaried staff and derived its income mainly from dividends from its Chinese subsidiaries. LAPL had seven members. The list of directors and the respective members represented by them is set out below:
The relevant provisions 12.In pertinent part, Statement 1.203 provides:
13.The Statement contains Guidelines including the following:
This appeal 14.The main thrust of the submissions of Mr Pang (who appeared for the respondent) was that the auditors’ role was to protect the shareholders. In the present case, the directors were the directly appointed representatives of the shareholders who together owned 100% of the company. The directors and, hence, the shareholders knew and approved of the tripartite role played by Mr Lam - as company secretary, accountant and auditor. They considered that there was no conflict of interest. In those circumstances, and having regard to the fact that no prejudice had been caused to any party, the Committee was wrong in finding that there had been a breach of professional standards on independence. 15.As to the auditors’ role, Mr Pang referred to the House of Lords decision in Carparo Industries PLC v Dickman [1990] 2 AC 605, 625 where Lord Bridge cited with approval a passage from the judgment of Bingham LJ in the Court of Appeal [1989] QB 653, 680-61 describing the role of the auditors:
I do not see how those observations which are not controversial assist Mr Pang’s case. 16.The correctness or otherwise of Mr Pang’s submissions lies in whether the directors and/or the shareholders may dispense with an audit altogether. The consent (express or implied) of the shareholders (acting through the directors) to the multiple roles assumed by the auditor is irrelevant unless it is within their powers to waive any irregularity and/or non-compliance. In other words, if compliance with the provisions of the Companies Ordinance relating to the accounts of a company cannot be achieved without an auditors’ report, the shareholders cannot and may not opt out of the requirement of an audit. If an audit has to be carried out, then the auditor carrying it out must comply with the requisite professional standards. 17.The purpose of the audit is apparent from the auditors’ report itself. The auditors’ report which the firm signed, in pertinent part, read:
18.It is the independent verification by a professional third party that lies at the heart of an audit. That is intended to ensure that the financial information prepared by the directors give a true and fair view of the company’s affairs and to provide shareholders with reliable information as to the company’s financial condition. Whether a conflict of interest situation arises or could be perceived to arise does not turn on either the smallness of the company or the number of transactions. 19.Mr Pang then referred to the Code of Ethics for Professional Accountants issued in December 2005 by the Institute. As it was a codification of existing standards, it was said that the fact that it was not in effect at the material time was nothing to the point. §§290.150-151 of the Code make it clear that, in general, a partner or an employee of the firm who serves as company secretary is considered to imply a close degree of association with the company and may create self-review and advocacy threats. Normally no safeguard could reduce the threat to an acceptable level,
§290.152 went on to provide that:
20.Mr Pang also drew attention to §§ 36-38 of the Guidelines:
It was said that even the Guidelines envisaged that preparation of accounts for audit is common and that there is no objection in principle to it as such. 21.Mr Pang submitted that the Committee failed to take into consideration the role played by Mr Lam as LAPL’s accountant as explained in his letter of 31 August 2008 to the Committee which stated that:
It was submitted that had it done so, the Committee would have realized that the work performed consisted of routine administrative matters which would not involve any conflict of interest. 22.The Guidelines are intended to give effect to the Statement 1.203 and the principles stated. They must be applied with that in mind and with common sense. Whether or not “objectivity may be threatened or appear to be threatened” is fact-sensitive. While participation in the preparation of accounting records may be acceptable, that would depend on the nature of the ‘participation’. On any view, it could not possibly cover a situation such as the present where the person conducting the audit had himself prepared the financial statements that were the subject matter of the audit. The perceived conflict of interest is all too obvious to require any elaboration. The respondent was fully cognisant of Mr Lam’s tripartite role. In my view the challenge to the Committee’s finding is entirely without merit. The penalty 23.Mr Pang also appealed against the penalty imposed on the ground that it was excessive. The Committee considered the respondent’s breach to be “of a very serious nature”. As earlier noted, it was the respondent who had asked Mr Lam to prepare LAPL’s accounts and perform audit work on behalf of the firm. 24.The penalty imposed by the Committee was within the Guideline to Disciplinary Committees for Determining Disciplinary Order. It is evident from §10 of its Decision on Sanction and Costs that the Committee considered that the upholding of the “core values of independence and professionalism” as set out in the Statement to be of primary importance and that ignorance or lack of understanding of the Statement provides no excuse. The Committee in imposing the penalty made allowance for the respondent’s “unblemished professional record” and the steps taken to avoid similar breaches in the future. 25.In those circumstances, it is not for this court to second-guess the profession who was well represented on the Committee as to the professional standards to be expected of members of that profession. For my part, I can see no basis for interfering with the penalty imposed. Order 26.I would dismiss this appeal. I would also order that there be an order nisi of costs in favour of the Registrar of the Institute. Hon Barma J: 27.I agree. Hon Le Pichon JA: 28.Accordingly, there will be an order in terms of §26.
Mr Robert Y H Pang and Ms Pauline Leung, instructed by Messrs Tam & Partners, for the Appellant Mr Eugene Fung, instructed by Messrs Mayer Brown JSM, for the Respondent |