PETER P.F. CHAN v. HONG KONG SOCIETY OF ACCOUNTANTS

CACV 469/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 469 OF 2000

(ON APPEAL FROM THE DISCIPLINARY COMMITTEE
OF THE HONG KONG SOCIETY OF ACCOUNTANTS)

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J U D G M E N T

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Hon Rogers VP :

1. This is an appeal under section 41 of the Professional Accountants Ordinance, Cap. 50. On 11 August 2000, a Disciplinary Committee of the Hong Kong Society of Accountants held that they were satisfied that two complaints made against the appellant were proved. The Disciplinary Committee ordered that, under section 35(1)(b) of the Ordinance, the appellant should be reprimanded, and under section 35(1)(c) the appellant should pay a penalty of HK$250,000 to the Society. The Disciplinary Committee further ordered that the costs and expenses of an incidental to the proceedings incurred by the Society and the complainant should be borne by the appellant.

2. The appellant is an accountant practising as a sole practitioner. He has had a long and unblemished career. He started practice more than 50 years ago and has been involved in a wide range of activities outside the specific confines of his accountancy profession.

3. The complaint against the appellant was that he had :

"... been negligent in the conduct of (his) profession in relation to the audit of the financial statements of International Hung Hsing Holding Limited, a company incorporated in Hong Kong with limited liability, for the year ended 31 December 1997."

Section 34(1)(iv) provides that a complaint that a professional accountant has been negligent in the conduct of his profession may be submitted by the Registrar to the Council which may, in its discretion refer the complaint to the Disciplinary Panel. The first particulars in relation to the complaint were that :

"The audit reports states that the Financial Statements were prepared in accordance with accounting principles generally accepted in Hong Kong. Accounting principles generally accepted in Hong Kong embody the Statements of Standard Accounting Practice ("SSAP") issued by the Society.

The audit report further states that pursuant to section 141D of the Companies Ordinance, the balance sheet of the Financial Statements should be prepared in accordance with the requirements of the Eleventh Schedule to the Companies Ordinance.

The auditor issued an unqualified opinion that the Financial Statements gave a "true and correct view" of the Company's affairs at the year ended 31 December 1997. This opinion was appropriate only if the Company was entitled to apply section 141D of the Companies Ordinance in the preparation of the Financial Statements and the Company had chosen to do so (section 141D(1)(e) refers). However, section 141D does not apply to any company that has subsidiary companies (section 141D(3) refers), as was the case of the Company (Note 6 on the accounts refers). In the circumstances, the auditor should have issued an opinion as to whether the Financial Statements showed a true and fair view of the state of affairs of the Company and of the group (comprising the Company and its subsidiary companies) at 31 December 1997 and of the profit or loss of the group for the year then ended, as required by section 141(3) of the Companies Ordinance."

4. There is no dispute that the Auditors' Report on the accounts which were audited under the appellant's name contained the statement that :

"We have audited the attached financial statements which have been prepared in accordance with accounting principles generally accepted in Hong Kong."

The accounts further stated under the heading "Respective Responsibilities of Directors and Auditors":

"The Companies Ordinance requires the directors to prepare a profit and loss account and a balance sheet. Pursuant to section 141D of the Ordinance, the balance sheet together with the notes thereon should be prepared in accordance with the requirements of the Eleventh Schedule. In preparing financial statements it is fundamental that appropriate accounting policies are selected and applied consistently.

It is our (i.e. the auditors) responsibility to form an independent opinion, based on our audit, on those statements and to report our opinion to you."

5. In the immediate reply by letter dated 29 October 1999, when the matter was first drawn to the attention of the appellant, he wrote to the Director of Professional Conduct of the Society saying :

"We are sorry that such report was issued. We have 5 softwares for audit purposes, out of which, one for nonprofit cases, one for true and fair view, one for 141D. The secretary in charge decides what to give on application by the managers. It cannot go wrong."

Following a further inquiry on 12 November the appellant wrote :

"The 141D report was an unfortunate mistake as explained in our letter of 29 October 1999. We submit that the points involved are insignificant to the shareholders, management and creditors as explained below. Barring any instructions from you, we do not wish to replace our auditors' report nor we wish to submit an application to court for sanction to replace it."

6. It is clear from those letters and, indeed, from the submissions of Mr Griffiths SC, who appeared on behalf of the appellant, that there was no dispute that the accounts should not have been prepared in accordance with section 141D and the Eleventh Schedule of the Companies Ordinance. Under section 141D(3)(a), section 141D does not apply to any private company which has any subsidiary or is a subsidiary of another company formed and registered under the Companies Ordinance. The Company indisputably falls within that category of having a subsidiary registered under the Companies Ordinance. Sections 124, 125 and 126 of the Companies Ordinance relate to the presentation of group accounts. The provisions of these sections were applicable in respect of the Company's accounts but were not applied.

7. The SSAP 7 relates to group accounts as well. Paragraph 15 of that requires that a holding company should prepare group accounts in the form of a single set of consolidated financial statements covering the holding company and its subsidiary companies, at home and overseas. There are exceptions to this but none appear to have been relevant to this case.

8. The appellant's primary position was that there had been no negligence of a professional character. The argument was that the accounts had been prepared to show a true and correct view of the state of the company's affairs and that had been done. It was said that the subsidiaries should be ignored because they were of virtually no value. In relation to the SSAP 7 it said that the Statements of Standard Accounting Practice were for guidance and not obligatory.

9. In the first place, it is clear and admitted that the accounts were not prepared in accordance with the requirements of the Companies Ordinance.

10. In the second place, it is also clear that the accounts were stated to be prepared in accordance with generally accepted accounting principles in Hong Kong. The generally accepted accounting principles in Hong Kong include the Standard Statements of Accounting Practice. This is made clear in the Foreword to Statements of Standard Accounting Practice, Interpretations and Accounting Guidelines.

The foreword

11. The foreword explains the authority, scope and application of Statements of Standard Accounting Practice (Accounting Standards), Interpretations and Accounting Guidelines issued by the Council of the Hong Kong Society of Accountants (HKSA) (hereafter referred to as "the Council").

12. One of the first statements made is that the Council expects members of HKSA who assume responsibilities in respect of financial statements to observe Accounting Standards. Paragraph 6 of the foreword states :

"Where members of the HKSA act as auditors or reporting accountants, they should be in a position to justify significant departures, to the extent that their concurrence with the departures is stated or implied. They are not, however, required to refer in their report to departures with which they concur, provided that adequate disclosure has been made in the notes to the financial statements."

Under the heading paragraph 8 states :

"Accounting Standards are applicable to financial statements of a reporting entity that are intended to give a true and fair view of its state of affairs at the balance sheet date and of its profit or loss (or income and expenditure) and cash flows for the financial period ending on that date."

Under the heading compliance with Accounting Standards paragraph 11 provides :

"Financial statements should not be described as complying with Accounting Standards unless they comply with all the requirements of each applicable Accounting Standard."

13. Indeed our attention was also drawn to the Statement of Auditing Standards 600, which relate to Auditors' reports on Financial Statements were relevant at the time the accounts of the Company were audited. Paragraph 34 states that :

"An unqualified opinion on financial statements is expressed when in the auditors' judgment they give a true and fair view (where relevant) and have been prepared in accordance with relevant accounting and other requirements."

Those "relevant accounting requirements" must include the Statements of Standard Accounting Practice. Sub-paragraph b of paragraph 34, indeed, states that :

"(The auditor's) judgment entails concluding whether the financial statements have been prepared in accordance with relevant legislation, regulations or applicable accounting standards (and that any departures are justified and adequately explained in the financial statements)."

There is no question here but that there was a departure from the Ordinance and the Accounting Standards and that these were not explained. Indeed, further reference can be made to paragraphs 40 of SAS 600 which requires that financial statements should normally include a statement that they comply with the "Companies Ordinance". In paragraph 41, it is stated that :

"Save in exceptional circumstances, compliance with accounting standards is necessary to give a true and fair view."

And paragraph 42 requires :

"Financial statements are normally required to contain particulars of any material departure from an accounting standard which applies to the reporting entity, together with the financial effects of the departure unless this would be impracticable or misleading in the context of giving a true and fair view."

14. There can, in the light of the above, be no doubt that the Statements of Standard Accounting Practice are applicable and are required to be followed. Importantly it is clearly wrong to describe financial statements as being prepared in accordance with accounting principles when they were in breach of the Statements of Standard Accounting Principles and in breach of the Companies Ordinance.

Mere slip

15. The argument that the presentation of the accounts on the basis that they had been prepared in accordance with section 141D was a mere slip on the part of the person preparing the accounts or indeed the secretary by using the wrong program does not obviate professional negligence. As is clear from the particulars of the charge and section 141D(1), it is necessary that all the shareholders of a private company must agree in writing for the section to apply. If an auditor were to approve financial statements on the basis of section 141D, it would be necessary for him to satisfy himself that there was such an agreement in writing. Furthermore, note 6 to the accounts clearly draws attention to the existence of a group of companies.

16. In the light of the foregoing, the conclusion that there had been negligence in the auditing of the financial statements cannot be assailed. Nor, would it be accurate to say that the fault lay simply in a clerical error. The accounts should clearly not have been approved in the form that they were, and the errors in so doing were not simply minor errors even though no loss to either shareholders, creditors or the Inland Revenue has been shown.

The second particulars

17. The second particulars of the charge related to the manner in which the fixed assets of the Company were shown in notes 4 and 5 of the accounts. The investment properties were listed as at 1 January 1997 as $108,177,392.41. There were additions in the course of the year in the order of $21 million. In note 4 it is said that :

"Some properties are designated as being retained for rental income. They are all stated at cost as management considered that the market value is higher."

In note 5 the reference is given :

"At cost and valuation".

18. The complaint under the second particulars was that the financial statements did not comply with SSAP 13. In particular, paragraph 8 of SSAP 13 requires that :

"... investment properties (should) be included in the balance sheet at their open market value, based on a period end valuation carried out :

a. annually by persons holding a recognised professional qualification in valuing properties and having recent post-qualification experience in valuing properties in the location and in the category of the properties concerned; and

b. at least every three years by an external valuer with similar qualifications to those in a. above."

19. There is no dispute that the previous valuation had been carried out on 29 September 1994 and hence a further three-year valuation was required to comply with SSAP 13, paragraph 8b. Whilst it was argued in respect of this also that the Statements of Standard Accounting Principles are not mandatory, for the reasons given above in respect of the complaint under the first particulars, any deviation from the accounting principles should only be in exceptional circumstances and the accounts should contain particulars of any material departure from the accounting standard.

20. In respect of these accounts, insofar as note 5 refers to a valuation, not only do the accounts not indicate that there had been no three-year valuation in accordance with SSAP 13, but the note renders them clearly potentially misleading in that respect.

21. It was said on behalf of the appellant that the financial statements had been presented to his firm very late, and that in order to comply with the requirements of the Inland Revenue they had to be audited in haste. Such need for haste cannot, however, constitute a defence to a complaint that the accounts had been prepared in breach of the accounting standards or the Companies Ordinance and that no qualification of the accounts had been made in that respect.

Bias

22. The appellant raises the argument in this court that there was a real danger that the appellant's position had been prejudiced before the Disciplinary Tribunal. The basis upon which this argument is raised is an agreed statement that :

"One member of the Disciplinary Committee was a partner of a firm of accountants and that that firm was itself being investigated by the Society at the time when the Disciplinary Tribunal was sitting."

23. For completeness, our attention was drawn to a decision of the Court of First Instance in relation to a judicial review application by that firm in connection with those disciplinary proceedings. It can be stated that the judicial review had been commenced prior to the sitting of the Disciplinary Tribunal in this matter, and the decision of the Court of First Instance had been given after the sitting of the Tribunal.

24. There is no suggestion that the particular member of the Disciplinary Tribunal was personally involved in the matters with which his firm was collectively charged and which involved the judicial review proceedings. In those circumstances, it is not evident that there is any real danger to the appellant that the appellant's position might have been prejudiced.

25. It was argued by Mr Griffiths SC that in view of the proceedings against the firm, of which the member of the Tribunal was a partner, that member might be disposed to be more compliant with the wishes of the Society and its officers and might wish to ingratiate himself with those in a position of authority. That is by no means evident on the facts. Furthermore, not only does it impugn a lack of integrity on the part of the member but the suggestion of prejudice could only be logical upon the basis of an implication against the integrity of the Society and its officers and that their position in the prosecution of their duties in relation to the member's firm would likely to be compromised. There is no basis for any such suggestion. It might be stated that Mr Griffiths stopped short of making such a suggestion but on the other hand could not provide any adequate explanation as to why the appellant's position might be prejudiced.

Penalty

26. The appellant appeals against the penalty on the basis that the amount of the financial penalty was excessive. There is little that can be gained from an analysis of previous penalties imposed by the Disciplinary Tribunal of the Society since the power to fine is of comparatively recent origin.

27. Neither would a comparison with fines imposed in the United Kingdom be of any great assistance. The circumstances prevailing in the United Kingdom particularly in respect of professional matters are considerably different from Hong Kong and what levels of financial penalty might be imposed in the United Kingdom in the circumstances prevailing there can form little guidance in respect of professional matters in Hong Kong. Furthermore, Mr Griffiths, was unable to draw our attention to the extent of the powers of imposing a financial penalty in the United Kingdom.

28. It is a well recognised rule in relation to the administration by professional bodies that those empowered, in this case under the Ordinance, to judge matters of professional conduct are the judges of the existence and importance of serious misconduct in a professional respect. See e.g. : Scrutton L. J. in Rex v. General Medical Council [1930] 1 K.B. 562 at 569; Sunil Chandra Bhattacharya v. General Medical Council [1967] 2 A.C. 259 at 265; and Libman v. General Medical Council [1972] A.C. 217

29. Particularly in the case of the imposition of a financial penalty, the judgment of the seriousness of the professional misconduct and the appropriateness of the financial penalty must be a matter for the Disciplinary Tribunal. They are composed of professional persons who are far better acquainted than the courts to judge these matters. Only if it can be shown that the Disciplinary Tribunal has gone clearly wrong in the assessment of a financial penalty should this court interfere.

30. As indicated, it was made clear by counsel on behalf of the Society that the conduct, the subject of the complaints, was by no means as insignificant as the submissions on behalf of the appellant would indicate. It can be acknowledged that no proof of damage can be shown. The fact that the appellant might have been opposed to the terms of SSAP 13 can afford little grounds for justifying a reduced penalty on that ground. On the other hand, there is no ground for supposing that the penalty had been increased because of some offence taken by some members of the Society in relation to the appellant's publicly stated attacks on the appropriateness of SSAP 13.

31. There are, in short, no grounds upon which this court should interfere with the penalty ordered by the Disciplinary Tribunal.

32. In my view this appeal must be dismissed. There should be an order nisi that the costs of this appeal should be to the Society.

Hon Le Pichon JA :

33. I agree with the judgment of the Vice-President.

Hon Burrell J :

34. I also agree and have nothing to add.