XN000022-1995-07-05 — Page 46

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The amendments to the Professional Accountants Ordinance specify the conditions under which incorporated auditing practices may register with the Hong Kong Society of Accountants (the HKSA), and make a number of other amendments consequential to this.

The HKSA has expressed concern to the Administration about the growing size and extent of claims against auditors overseas and the fact that auditors in Hong Kong were potentially similarly exposed because of the law relating to joint and several liability and related issues. They considered it to be inequitable that a partner in a firm could be held personally liable for claims arising from the professional negligence of other partners and suggested that there was evidence that this situation was deterring new entrants to the profession overseas. One proposal put forward by the HKSA was to permit accountancy firms to form limited liability companies, which they believed would help bring the extent of personal liability taken by the principals in a practice within known and reasonable bounds. This is a facility that is already permitted in a number of jurisdictions overseas.

Following consultation with the Standing Committee on Company Law Reform, the Administration indicated that if the proposal were to be pursued, assurances would need to be given that adequate standards of auditing would be maintained and that incorporated practices would take out sufficient levels of Professional Indemnity Insurance to meet claims against them.

Since that time steps have been taken to address these concerns. A Practice Review programme was introduced by the HKSA in 1992, the objective of which is to review the compliance of all practice units with accounting and professional standards. Reviews are progressively being undertaken with all practices regulated by the HKSA and follow-up visits have been instituted for problem practices. Ultimately, the HKSA is empowered to take disciplinary action against those who persistently fail to comply with the requisite standards.

On the question of Professional Indemnity Insurance. the Society has negotiated a Master Insurance Policy to which all incorporated practices will be required to subscribe. This will provide the minimum required levels of insurance coverage for smaller practices. Larger practices will be required to take out additional minimum cover based on either a multiple of their gross fee income or an amount per principal. These minimum levels of insurance will be specified rules to be made by the HKSA Council. The general guideline will be for incorporated practices to take reasonable steps to be able to meet claims against them.