THE REGISTRAR OF THE HONG KONG INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS v. CHEUNG YIU HUNG

CACV 142/2017

[2018] HKCA 463

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 142 OF 2017

(ON APPEAL FROM the Disciplinary Committee of the Hong Kong Institute of Certified Public Accountants Proceedings No. D-15-1049P)

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J U D G M E N T

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Hon Yuen JA:

1.  This is the appeal of Mr Cheung Yiu Hung, a certified public accountant, from the sanctions imposed upon him by the Disciplinary Committee (“DC”) of the Hong Kong Institute of Certified Public Accountants (“ICPA”) pursuant to the provisions of the Professional Accountants Ordinance Cap 50 (“PAO”) after a two-day hearing in January 2017 culminating in a decision given on 1 June 2017 (“the Decision”).

2.  The DC found that five complaints raised by the Practice Review Committee (“PRC”) of the ICPA, all of which Mr Cheung had denied, were substantiated.  There is no appeal from this finding.  However it is necessary to set out the complaints briefly as they are relevant to the appeal from the sanctions imposed.  

3.1  The complaints were that Mr Cheung had failed or neglected to observe, maintain or otherwise apply the following professional standards, viz:

(1)  Hong Kong Standard on Quality Control 1 (“HKSQC 1”), in that his practice had not implemented adequate quality control policies and procedures in respect of monitoring, client acceptance and continuance, and engagement performance;

(2)  Hong Kong Standard of Auditing 500 (“HKSA 500”) para. 6, in that he had failed to design and/or perform appropriate audit procedures to obtain sufficient appropriate audit evidence in relation to the audit of Client S’ financial statements for the year ended 31 March 2013;

(3)  a complaint similar to (2) above but in relation to the audit of Client Y’s financial statements for the year ended 31 March 2013;

(4)  Hong Kong Standard of Auditing 230 (“HKSA 230”) para. 5, in that he had failed to adequately document the evidence obtained and procedures performed in relation to the audit of Client S’ financial statements for the year ended 31 March 2013;

(5)  a complaint similar to (4) above but in relation to the audit of Client Y’s financial statements for the year ended 31 March 2013.

3.2  In summary,

  Complaint (1) related to quality control;

  Complaints (2) and (3) related to the requirement for adequate evidence to perform audits; and

  Complaints (4) and (5) related to the requirement of documentation of audit work.

Background

4.  By way of background, Mr Cheung was the sole proprietor of YH Cheung & Company (“the Practice”). 

Initial Review

5.1  The Practice was selected for a practice review in May 2013 (“the Initial Review”). 

5.2  During the Initial Review, the practice reviewers

(a)  conducted assessments on the system of quality control, and

(b)  selected for review two completed audit engagements (for Client S and Client Y) for the year ended 31 March 2012. 

Various deficiencies were found in quality control and the audit engagements.

5.3  On 15 July 2013, Mr Cheung undertook to implement improvements, including “monitoring review to be carried out at year end”¹, to address the deficiencies. At around the same time, the practice reviewers’ report (“the Initial Review Report”) was sent to the Practice.

Second Review               

6.1  However when the practice reviewers conducted a follow-up practice review in May 2014 (“the 2^nd Review”) it found that the improvements Mr Cheung had promised had not been implemented. 

6.2  Further when the practice reviewers examined the audit engagement papers of the same clients S and Y for the year ended 31 March 2013, they found the same or similar deficiencies which they had previously identified in the Initial Review Report.  These were set out in another report (“the 2^nd Review Report”).

7.  The ICPA duly wrote to Mr Cheung in October 2014 seeking his explanation.  In his reply, he accepted that the monitoring review he had promised had not been carried out. 

8.  As for the deficiencies, Mr Cheung claimed that adequate work had in fact been carried out in the audit, only that there were no documents showing the work had been done. 

Complaints raised

9.  In September 2015 the PRC decided to raise the complaints set out above² against Mr Cheung.  They were set out in detail in a letter dated 2 October 2015 from the Associate Director, Compliance, of the ICPA to Mr Cheung. 

10.  On 14 October 2015, Mr Cheung replied saying (amongst other things):

“As the complains are based on the judgement of the authority, a small firm cannot do anything other than pleading for leniency of the authority on imposing the penalty”.

He then set out representations in relation to each of the complaints which he said were

“explanations designed to enable the authority to understand my situation and my efforts made after May 2014 to improve the audit quality, taken into considerations the present trend in dealing with the accounting and auditing of small private companies”. (Emphasis added).

At the conclusion of the reply, he wrote:

“The above is my work done after the second practice review and my plan for 2016. I hope that they will reduce my penalty for my error in 2014.

You have the authority to levy penalty. I hope that you will take the above improvements and changes into your consideration of the penalty”. (Emphasis added).

DC proceedings

11.1  On 22 December 2015, the DC proceedings commenced.  In light of Mr Cheung’s reply above, the DC asked for submissions only on sanctions and costs from the PRC and Mr Cheung. 

11.2  In a letter dated 12 January 2016, the PRC wrote (amongst other things):

“The [PRC] has no objection to any regard which the [DC] may have to the fact that [Mr Cheung] admitted the complaint, thereby avoiding the need of taking the steps as set out in Rules 17 to 30³ of the Disciplinary Committee Proceedings Rules”.

In respect of sanctions, the PRC stated that it considered the case to be serious and

“Therefore, a cancellation of [Mr Cheung’s] practising certificate for such period as the Committee thinks fit would be appropriate to protect the public from the risk of substandard audit work being carried out. The sanction, though severe, will also send out a clear message to [Mr Cheung] and other members that lax quality control and persistent audit failures will not and should not be tolerated”.

11.3  However Mr Cheung then decided to challenge the complaints, asserting that the conduct of the Practice had complied with the principles of the relevant HKAS.

12.  Consequently the DC held a hearing of the complaints in January 2017.  Mr Cheung was unrepresented and put forward a number of defences to each of the complaints.  As noted earlier, they were rejected by the DC. 

The Decision

(1) - Complaint regarding Lack of Quality Control

13.  C1(a)

  First, Mr Cheung had failed to establish a monitoring process of the system of quality control including, on a cyclical basis, inspection of at least one completed engagement.  After the Initial Review, he had undertaken that he would carry out a monitoring review, but he failed to do so. 

  In defence Mr Cheung claimed that he had in fact found an external monitor, but then withheld his engagement as he thought the 2^nd Review would serve the purpose.

  The DC found that not only did Mr Cheung fail to comply with his undertaking, his “misconception that the Practice Review could be a substitute for a monitoring review demonstrated [his] lack of understanding of the requirements for a proper monitoring review”⁴. 

      C1(b)

  Second, the Practice’s Client Acceptance Forms were deficient in that they did not provide:

(a)  any documents showing compliance with the requirement of independence; and

(b)  a date of approval which would show if the client acceptance process had been performed before the engagement was accepted.

  Mr Cheung’s argument was that the client in one case was a small church, and in the other, a small company, and he did not feel “any threat existed”. 

  The DC held, with reference to §§21 -24 of HKSQC⁵, that these were irrelevant considerations. 

      C1(c)

  Third, deficiencies found in the Initial Review in areas including assessment of fraud risk were found to have recurred in the 2^nd Review, which led the DC to conclude that the Practice had not established practices and procedures to ensure that audit engagements were performed in accordance with relevant auditing standards⁶.

(2) and (3) - Complaints regarding inadequacy of evidence to perform audits

14.  C2&3 (a)  Assessment Procedures of Clients’ key internal controls

  For both Clients S and Y, it was found that both at the Initial Review and at the 2^nd Review, there were no adequate evaluations of the design and implementation of those clients’ key internal controls.  

  Mr Cheung’s response varied in point of time:

(i)  in 2013 he admitted that the Practice did not seriously carry out evaluation of internal control because it was the directors of the clients who were responsible for internal control, but he promised that evaluation work sheets would be prepared in the future;

(ii)  in 2014, he claimed to have concluded by way of evaluation that as private companies, the clients had a director-controlled system;

(iii)  in 2015, he said as he had been auditing these clients’ accounts for over 5 years he had a deep knowledge of their key controls and fraud risk areas, and that it was possible that because the evaluation form and fraud risk assessment had been written for his own use, it may be unclear to others. 

  However for Client S there was no evidence of evaluation of the internal controls, and none of Client Y’s internal key controls had been reviewed.   The DC found that in the Practice’s 2013 Working Papers, the risk assessment forms referred only to internal control by the directors of the clients, and the only procedures said to be performed to identify misstatement were in relation to assertion level for individual account balances and transactions⁷.

15.  C2&3 (b)  Risk Assessment (Fraud)   

  After the Initial Review, Mr Cheung admitted that there were no fraud risk assessment worksheets and undertook to include them in the future. 

  However, despite his promises, the DC found no such documents for Client S and Client Y for the year ended 31 March 2013 either⁸.

16.  C2&3 (c)  Accounting Treatment of Bank Borrowings

  Client S received bills of exchange which it discounted to a bank with recourse to it.  In the Practice’s Working Papers, the funds which Client S received from the bank were simply set off against accounts receivable.  There was no reflection of the fact that until the bank received payment from the issuer of the bills of exchange, Client S still had a contractual right to receive cash from the debtors and it remained under a contractual obligation to repay the bank.

  Mr Cheung’s argument was based on disclosure of liability, when the real issue was de-recognition (ie the removal of the respective asset and liability from the balance sheet).

  The DC rejected Mr Cheung’s argument, noting that it demonstrated Mr Cheung’s lack of knowledge of the issue involved in accounting standard⁹.

17.  C2&3 (d)  Accounting Treatment of Investment Properties

  Client Y had some properties which had been rented out to third parties since acquisition.  In the Practice’s Working Papers, the properties were classified as property, plant and equipment, when they should have been classified as investment properties.               

  Mr Cheung argued that that treatment was based on the client’s choice, as it did not wish to incur the cost of obtaining a valuation. 

  The DC found that in submitting to the client’s wishes, the Practice had failed to assess the relevant accounting treatment independently, and there was no evidence that the Practice had done any work to justify how it treated the nature and purpose of these properties¹⁰.

(4) and (5) - Complaints regarding absence of documentation of audit work

18.  C4&5 (a)  Materiality

  The concept of materiality is relevant in auditing, eg in evaluating the effect of misstatements.  The HKSA¹¹ stipulates that an auditor should set out the factors considered in determining materiality.

  In response to the Initial Review, Mr Cheung had undertaken to cause a written decision of the basis of materiality level to be adopted in every file.

  However at the 2^nd Review, no documentation in this respect was found.

  In his response Mr Cheung said he had set a blanket materiality level of 5%, but the DC found that this did not appear in the documents, nor were there any documents showing how the absolute amount of HK$50,000 used for both Clients S and Y were determined¹².     

19.  C4&5 (b)

(i)  Sample Size and Selection of Items for Testing

  In respect of Client S, after the Initial Review, Mr Cheung had admitted that he had not sent out confirmations to creditors, and that the sample size for sale and purchase was too small.  He agreed that additional samples would be selected for the following year.    

  However, the DC found that for the year ended 31 March 2013, there was still no record of the sampling methodology or the carrying out of random sampling.  The sampling was still a small percentage in value of the total accounts payable and turnover¹³.

(ii)  Recoverability of amount due

  In respect of Client Y, there was a substantial amount due from a related company, but the Initial Review found that audit work to assess the recoverability of this amount had not been done. Mr Cheung had admitted that the Practice had neglected to document the audit work.

  However, the DC found that for the year ended 31 March 2013, there was still no documentation, despite Mr Cheung’s allegation that he did have documents (not produced) to support his audit¹⁴. 

  As the DC noted, the complaint was not whether the audit was correct or sufficient.  What the professional standard required was proper documentation, not simply a bare assertion on Mr Cheung’s part that he knew the client well and had knowledge of the soundness of the finances of the debtor company¹⁵.

20.  C4&5 (c) Assessment of Deferred Taxation

  Finally, for the audits of both Client S and Client Y, there were no documents to show what work (if any) the Practice had done to ascertain whether deferred taxation was appropriately recognized by these clients for all taxable temporary differences.   

  Mr Cheung accepted the absence of documentation.  He argued that both companies could dispense with deferred taxation pursuant to a change in the Companies Ordinance.

  This argument was rejected by the DC which pointed out that the change in the Ordinance came into effect only after the date of the audit period in question¹⁶.  But as the DC pointed out, the more important aspect of the complaint was the lack of documentation¹⁷.

Sanctions

21.  We have set out the complaints in some detail above so that one can see the context in which the DC imposed the sanctions.

22.  Having been satisfied that all five complaints had been proved by the PRC, the DC said:

“Having regard to all the aforesaid matters, including the particulars in support of the Complaints, the submissions on sanction and costs of the [PRC] and [Mr Cheung] respectively and his conduct throughout the proceedings, the [DC] makes the following ORDERS:

(a)  [Mr Cheung] be reprimanded under section 35(1)(b) of the PAO;

(b)  the practising certificate issued to [Mr Cheung] be cancelled under section 35(1)(da) of the PAO, effective from the 42^nd day after the date hereof under section 35(1)(a) of the PAO;

(c)  a practising certificate shall not be issued to [Mr Cheung] for 18 months commencing from the 42^nd day after the date hereof under section 35(1)(db) of the PAO;

(d)  [Mr Cheung] pay a penalty in the total sum of HK$50,000 under section 35(1)(c) of the PAO; and

(e)  [Mr Cheung] pay the costs and expenses of and incidental to the proceedings of the [PRC] in the sum of HK$110,094 and that of the Clerk in the sum of HK$18,542 under section 35(1)(iii) of the PAO.”

Appeal

23.  Mr Cheung, now legally represented by Mr Gary CC Lam, appealed only para. (c) of the sanction order.

24.  Mr Lam argued that the 18 months’ period¹⁸ was “clearly wrong and clearly excessive” having regard to:

(1)  the nature of the misconduct;

(2)  the past decisions of the DC, such as Chan Po Kau Simon (21.11.2014), Re Ho Lap Wing Anthony (29.12.2015) and Re Ng Kwong Sang (11.8.2016), all of which involved periods of only 1 year, and Re Sek Wai Tong Stonely (21.4.2016), where the accountant in question received only a reprimand¹⁹; and

(3)  the sole proprietorship and small firm nature of Mr Cheung’s practice. 

Discussion

25.  The approach taken by this court in appeals from sanctions has been set out clearly in Registrar of the Hong Kong Institute of Certified Public Accountants v Leung Kam Man Victor²⁰.  Lam VP set out the guiding principles to be applied to this kind of appeal as follows:

“11. ... As the sanction was imposed by a specialist tribunal whose members consisted of members of the same profession as the [appellant accountant] and possessed the expertise and knowledge in professional standards, this court would interfere only if the sanction imposed is plainly wrong ...

...

13. Thus though the court can examine a penalty imposed by a disciplinary tribunal or committee to see if it is excessive or disproportionate, it would accord an appropriate measure of respect to the judgment of such tribunal or committee.

14. What does this mean in practice? The court acknowledges that a disciplinary tribunal or committee has to exercise their judgment on penalty by reference to the facts of that particular case, their assessment of the seriousness of the findings and the measures that need to be imposed to reflect the same and to maintain the standard of the profession. In these matters, in particular the latter two aspects, professional judgment and expertise are highly germane. ... the court will give due weight to such professional judgment and expertise.

15. The court further accepts that there could be variations in sanctions imposed by different members of the committee. It is not at all surprising that committees differently constituted could reasonably take different views on the seriousness of a contravention of a particular rule (especially viewed against different sets of factual background) and on the measures that should be imposed by way of sanction. So long as the sanction imposed falls within the reasonable range of options, the court will not intervene. In short, the disciplinary tribunal or committee has a margin of discretion in deciding the appropriate discretion to maintain the standards of the profession, see Lau Koon Leung v Medical Council of Hong Kong ...

16. It follows that the mere citation of other decisions in which the sanctions appear to be lighter cannot be a valid ground of appeal. ...”.

26.1  Mr Lam accepts that these guiding principles set a high threshold.  He also accepts that shortly after the date of the DC decision in the present case, the DC has ordered that a practising certificate shall not be issued for a period of 2 years in Tam Tak Kuen Alfred (12.10.2017), which was longer than in the present case.

26.2  However, Mr Lam submitted that no dishonesty was involved in the findings and Clients S and Y were private companies.  Further there was no finding that any material errors in the financial statements, or loss to any entities, had been caused. 

26.3  Mr Lam submitted that at the time the DC considered the sanction in this case, the longest period during which a DC had ordered that a practising certificate shall not be issued was 12 months only, and the DC had given no explanation for the increase of 50% for the present case.

27.  In our view, despite Mr Lam’s best efforts, this appeal has failed to reach the high threshold set out in the guiding principles for appeals from sanctions ordered by professional disciplinary tribunals.  Whilst the sanction in the present case is heavy, it cannot be said to be so outside the reasonable range of options that this court should intervene by reason of its excessiveness or disproportionality. 

28.  The DC had called for, and had received submissions on sanctions from the PRC and from Mr Cheung before reaching its decision.  There is no scale or tariff, so it was not required to justify any increase of penalty by percentage or otherwise. 

29.  We have read the decisions in Ho Lap Wing Anthony, Ng Kwong Sang and Sek Wai Tong Stonely where the facts bear some resemblance to those in the present case, but one important distinction is that in those cases, the accountants in question had acknowledged their failure to observe professional standards by admitting their liability for the complaints.  Indeed that was Mr Cheung’s initial response as well.

30.  However at the time of the hearing, Mr Cheung reversed his position.  And he did not simply put the PRC to proof of its complaints.  He sought to argue he had a defence (or defences) for each complaint.  Unfortunately some of the defences put forward by Mr Cheung demonstrated to the DC his lack of understanding of professional requirements (§18 of the Decision) and his lack of knowledge of the issue involved (§61). As an example, his lack of awareness of the importance of maintaining independence from his clients was shown not only by the absence of appropriate documentation stating the same (§26), but also by the fact that one of the defences he put forward (for treating investment properties as property, plant and equipment) was that he was submitting to the client’s wishes to cut costs (§69).

31.  The DC had sat for two days and had produced a 25-page Reasons for Decision and Orders, discussing in detail Mr Cheung’s defence to each of the complaints.   Knowing the case in such detail, it was thus well aware of the extent of seriousness of the findings, and the measures that needed to be imposed to reflect the same and to maintain the standard of the profession. 

32.  Given that some of the defences Mr Cheung had put forward revealed that for some, he was conceptually wrong²¹, and for others, were simply not supported by documents which he had made bare assertions he possessed²², the DC was entitled to state that one of the factors to which it had regard was Mr Cheung’s “conduct throughout the proceedings”²³. 

33.  Finally Mr Lam submitted that it was the first time that Mr Cheung had been found liable for professional misconduct, he was the sole proprietor of his firm, his clients were small companies and it was emphasized to this court that his employees would be rendered unemployed if the sanction appealed from is not set aside or at least reduced.

34.  With respect, whilst a failure to observe professional standards may be made more egregious when a public company is involved, it cannot be a reason for letting professional standards slip that an accountant’s firm was a small one or his clients were small companies.  An accountant is accorded the privilege of practice by virtue of membership of his professional body.  For that privilege, he has to comply with its standards, whether or not he considers them to be too demanding for him, and whether his firm is big or small, and irrespective of the status of his clients. 

Order

35.  For the reasons set out above, we would dismiss the appeal.  As both parties had agreed that costs should follow the event, Mr Cheung will have to pay the costs of the Registrar of the ICPA.

Hon Chu JA:

37.  I agree with the Judgment of Yuen JA.

Hon Barma JA:

38.  I agree with the Judgment of Yuen JA.