THE PRACTICE REVIEW COMMITTEE OF THE HONG KONG INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS v. NG KWOK CHING

CACV 42/2019

[2020] HKCA 672

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 42 OF 2019

(ON APPEAL FROM PROCEEDINGS NO D-16-1226P, M119510)

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JUDGMENT

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Hon Lam VP (giving the Judgment of the Court):

Introduction

1.  On 9 March 2020, the Respondent filed a summons to apply for leave to adduce new evidence in the present appeal.  The appeal is brought in respect of the decision of the Disciplinary Committee of the Hong Kong Institute of Certified Public Accountants (“Discipline Committee”) dated 28 December 2018 (“Decision”), in which the Discipline Committee ordered that:

(a)  the practising certificate of the Respondent be cancelled under Section 35(1)(da) of the Professional Accountants Ordinance, Cap 50 (“PAO”) effective on the 42^nd day from the date of this order and a practising certificate shall not be issued to the Respondent for 12 months commencing from the 42^nd day after the date of this order under Section 35(1)(db) of the PAO;

(b)  the Respondent be reprimanded under Section 35(1)(b) of the PAO;

(c)  the Respondent pay a penalty of HK$50,000 under Section 35(1)(c) of the PAO; and

(d)  the Respondent do pay the costs and expenses of and incidental to the proceedings of the Complainant in the sum of HK$55,000 under Section 35(1)(iii) of the PAO. 

2.  The Respondent filed his Notice of Appeal on 30 January 2019, followed by a Supplementary Notice of Appeal on 12 August 2019.  The Respondent has proposed that this application to adduce new evidence be dealt with on paper without a hearing.  We consider that it is appropriate to do so pursuant to Order 59 rule 14A of the Rules of the High Court, Cap 4A.  This is our judgment on the application to adduce new evidence.

Background

3.  The particulars of the Complainant’s complaints against the Respondent were set out at paragraphs 17 to 24 of the Decision as follows:

“ First Complaint

17. Section 34(1)(a)(vi) of the Professional Accountants Ordinance (“PAO”) applies to the Respondent in that he had failed or neglected to observe, maintain or otherwise apply a professional standard namely, paragraph 6 of HKSA 500 in that he had failed to design and/or perform audit procedures that are appropriate for the purpose of obtaining sufficient appropriate audit evidence in relation to the audit of the financial statements for Client L for the year ended 31 December 2014.

Second Complaint

18. Section 34(1)(a)(vi) of the PAO applies to the Respondent in that he had failed or neglected to observe, maintain or otherwise apply a professional standard namely, paragraph 9 of HKSA 230 in that he had failed to record the person who performed that audit work and the date when such work was completed in relation to the audit of the financial statements of Client L for the year ended 31 December 2014.

Facts and circumstances in support of the First Complaint

19. The auditor’s report issued by the Respondent for Client L stated that the auditor had conducted the audit in accordance with HKSAs issued by the Institute.

20. According to paragraph 6 of HKSA 500, an auditor is required to design and perform audit procedures that are appropriate in the circumstances for the purpose of obtaining sufficient appropriate audit evidence.

21. The audit working papers of Client L did not show any evidence that the Practice had properly carried out audit procedures for the purpose of obtaining sufficient appropriate audit evidence in respect of the following accounts which are material to the financial statements. The aggregate value of these accounts represented 67% of Client L’s net assets as at 31 December 2014.

21.1 Interest in a subsidiary and an associate

(a) The working papers show that the balance of interests in a subsidiary as at the year end date was HK$1,815,548 (including an amount due from a subsidiary of HK$1,815,546) and the balance of investment in an associate was HK$579,975.

(b) The Respondent did not carry out any audit work to:

(i) verify the ownership of the investments in the subsidiary and the associate by Client L as at the year end date;

(ii) ascertain the existence of the amount due from the subsidiary by performing alternative procedures on the non-replied confirmation from the subsidiary before the auditor’s report date;

(iii) assess the recoverability of the amount due from the subsidiary; and

(iv) perform impairment assessment on the investment in the associate even though it was documented that the associate would be wound up in 2015.

21.2 Financial assets at fair value through profit or loss

(a) The working papers show that the balance of financial assets at fair value through profit or loss as at the year end date was HK$28,946,282. Such balance comprised investments of listed shares in Hong Kong and overseas of HK$11,486,720 and HK$17,459,562 respectively.

(b) No audit procedures were carried out to ascertain the ownership of the shares and their relevant market values as at the year end date.

21.3 Amounts due to directors and shareholders

(a) The working papers show that the balances of amounts due to directors and shareholders as at the year end date were HK$539,765 and HK$794,499 respectively.

(b) The audit documentation indicated that the auditor had sent confirmation requests to some of the directors and shareholders to ascertain the balances due from Client L as at the year end date. However, there was no evidence showing that the auditor had performed any alternative procedures to obtain relevant and reliable audit evidence on the non-replied confirmations before the auditor’s report date.

21.4 Audit procedures under HKSA 580 “Written Representations”

(a) During the follow up visit, the Reviewer noted that the management representation letter dated 31 January 2015 was only received by the Respondent in March 2016, subsequent to the auditor’s report dated 30 March 2015.

(b) There was no evidence that the Practice had obtained the management representation as part of the audit evidence before the auditor’s report date to substantiate its compliance with HKSA 580 in the audit of Client L.

22. On the basis of the above findings, the Practice is considered to have failed to comply with paragraph 6 of HKSA 500 in that it did not obtain sufficient and appropriate audit evidence such that a reasonable conclusion could be drawn on the relevant accounts.

Facts and circumstances in support of the Second Complaint

23. According to paragraph 9 of HKSA 230, an auditor shall record who performed that audit work and the date such work was completed.

24. The Respondent admitted to the Reviewer that the audit of Client L was performed by a subcontractor.  But since the subcontractor did not sign or date any of the working papers of Client L, there was no information in the audit working papers indicating the person who performed the audit work and the date when such work was completed in accordance with paragraph 9 of HKSA 230.”

Discipline Committee Decision

4.  After conducting a hearing on 27 September 2018, the Discipline Committee by its Decision of 28 December 2018 found the complaints against the Respondent proven.  The Discipline Committee’s reasons set out at paragraphs 27 to 31 of the Decision are as follows:

“ 27. The Complaints resulted from repeated findings of deficiencies from a follow up review on the Respondent’s practice. The Committee is of the view that the Respondent had failed to address the audit deficiencies found by the practice reviewer.

28. In addition, the Respondent’s representations throughout the proceedings and the hearing on 27 September 2018 demonstrated that he lacked understanding at the level expected of a competent professional accountant, and in particular, about the difference between the role of an auditor and an accountant. The Respondent admitted to have prepared the accounts for Client L, without due regard to his independence as an auditor. As a result, the Respondent failed to envisage the need to perform adequate audit procedures on Client L’s accounts which an independent auditor would otherwise perform. The Respondent even claimed that extracting the total from client ledgers for the ‘creation of financial statements” is part of ‘analytical auditing’.

29. Further, the Committee is concerned with the Respondent’s repeated representation that for a dormant company or a private company of limited size, a ‘full audit’ should not be carried. The Committee is of grave concern if practitioners draw different auditing standards based on the size of the company.

30. During the hearing, the Committee also found that the accuracy of the financial statement of Client L is somewhat questionable. For example, the fair value loss on financial asset at fair value was calculated based on the Respondent’s claim that he checked against the closing prices of the respective listed securities’ websites. There have not been any records of the Respondent’s review of the websites at the relevant time, apart from a record of the bank statement of Client L showing its portfolio value as shown in the bank statement of Client L. Even if the benefit of doubt is given to the Respondent that he did review the websites at the relevant times, it seems to the Committee, that the Respondent should have enquired into the actual investment costs of the additions in number of shares held. The Committee is of the view that there may be more similar questions that can be made on the accuracy of the financial statement of Client L and such questions are avoidable should adequate audit procedures have been carried out.

31. As such, the Committee found the Complaints proven and considered the matter serious that a cancellation of the Respondent’s practicing certificate is appropriate.”

New evidence sought to be adduced on appeal

5.  The Respondent originally sought to adduce as new evidence on appeal his affirmation of 7 January 2020.  After obtaining legal advice, the Respondent in his counsel’s written submissions of 12 June 2020 reduced the scope of his application: he now applies only to adduce 3 pages from Exhibit NKC-3 of his affirmation, namely: (1) the cover page of the annual report for 2013 of a company listed on the Singapore Exchange in which Client L apparently invested[1]; (2) page 83 of that report listing the 20 largest shareholders (including Client L) together with the number and percentage of shares held by each as at 17 March 2014[2]; and (3) page 87 of that report, containing a definition of “Maximum Price”[3].

6.  According to the Respondent’s counsel’s submissions of 12 June 2020, the 3 specified pages that the Respondent seeks to adduce are intended to be in answer to paragraph 21.2 of the Decision.

7.  The Respondent’s position is that at the disciplinary hearing of 27 September 2018, at which he was not legally represented, he requested to adduce documentary evidence to show that he verified the ownership and value of shares, but his request was apparently ignored.

8.  The Complainant pointed out that at the index[4] in Exhibit NKC-3 of the Respondent’s affirmation, the date given for the annual report 2013 is “12-03-2016”.  Thus the copy of annual report 2013 was obtained by the Respondent in March 2016, well after the auditors’ report was issued in March 2015 for the year ended 31 December 2014, and therefore irrelevant for this appeal.

9.  In the reply submissions of counsel for the Respondent dated 2 July 2020, he could not dispute that the copy of annual report was obtained in March 2016.  He reiterated that the Respondent had checked the listed shares assets of Client L on the Internet before issuing the audit report on 30 March 2015.  He drew attention to the fact that the Annual Report of Broadway (item 14) in Exhibit NKC-3 of the Respondent’s affirmation[5] refers to the annual report 2013 as an electronic file.  He asked the Court to infer that the Respondent obtained or printed the annual report 2013 on or about 12 March 2016 to show to the Disciplinary Committee that he had made the verification on overseas listed shares.  However there is no evidence from the Respondent saying so.

Test for adducing new evidence on appeal of a disciplinary decision

10.  Applications to adduce new evidence on appeal are governed by Order 59, rule 10(2) of the Rules of the High Court, Cap 4A:

“ The Court of Appeal shall have power to receive further evidence on questions of fact, either by oral examination in court, by affidavit, or by deposition taken before an examiner, but no such further evidence (other than evidence as to matters which have occurred after the date of the trial or hearing) shall be admitted except on special grounds.”

11.  As held in Ladd v Marshall, [1954] 1 WLR 1489, further evidence is admissible on appeal only where such evidence:

(i)    could not have been obtained at the trial with reasonable diligence;

(ii)   would or might, if believed, have a very important influence on the result of the case, though it need not be decisive; and

(iii)  is apparently credible though need not be incontrovertible.

12.  In Chan Chiu Yin v Chan Ki Kau, CACV 468/2001, [2003] HKEC 652 at [31], Woo JA held that the principles of Ladd v Marshall should be applied in a manner which would achieve the overriding objective of doing justice.  On the facts in Chan Chiu Yin, the Court found that the deputy judge (sitting as the Lands Tribunal) failed to give the tenant an opportunity to finish making his case or adduce evidence as to the primary use of the land.  In light of such irregularity, the court granted leave to the tenant to adduce new evidence.

13.  As discussed below, Mr Liu, counsel for the Respondent relied strongly on this authority.

Application of the principles to the present application

14.  In our judgment, the Respondent’s application failed to meet the test in Ladd v Marshall and cannot rely on Chan Chiu Yin to overcome such difficulty.

15.  The Respondent’s case is not that the new evidence could not be obtained prior to the disciplinary hearing on 27 September 2018.  By the Respondent’s own admission, the new evidence was already in his possession for some time before the hearing and he had ample opportunities to adduce the new evidence before the disciplinary hearing took place.

16.  The Respondent did not explain why he did not include the copy of the Annual Report in the documents he produced before the hearing.  The Disciplinary Committee Proceedings Rules required him to annex all documentary evidence on which he relied.

17.  The Respondent’s contention is that the Discipline Committee failed to deal with or ignored his request at the disciplinary hearing to adduce the new evidence, therefore the new evidence has not been admitted at the hearing.  The Respondent referred to the transcript of the hearing at paragraphs 207 to 238, in support of his position.

18.  In our judgment, this argument has no merit.  The transcript showed that though the Complainant had told the Discipline Committee that the Respondent had confirmed he had produced all working papers and would therefore object to production of further documents, the Committee did not preclude the Respondent from making application to do so.  The Respondent simply made no application to do so. 

19.  The Discipline Committee gave the Respondent the last word in making his closing arguments and confirmed with him at the end of the hearing whether he had finished making his points before concluding the hearing, see paragraphs 278 to 281 of the hearing transcript.

20.  Further, the Discipline Committee did not give its decision immediately at the end of the hearing. There was ample time for the Respondent to submit the statement he wished to bring to the Committee’s attention between the end of the hearing and the giving of decision.  He did not make any application to do so.  

21.  In any event, it is by no means clear to us that the “statement” that the Respondent mentioned at that part of his evidence at the hearing (counter 229) was the copy of Annual Report he now wishes to produce as new evidence.

22.  We are not minded to draw the inference suggested by counsel when the Respondent did not even say so in his affirmation of 7 January 2020.

23.  In any event, given counsel’s clarification at [9] above, the Respondent must have understood that the copy of the Annual Report obtained since the preparation of audited report did not form part of his working papers.  As submitted by the Complainant, the production of this copy at the hearing could not assist the Respondent in his defence. 

24.  We are not satisfied that there had been any irregularity at the hearing leading to the Respondent not submitting the Annual Report to the Committee.  In the circumstances, Chan Chiu Yin is irrelevant.

25.  The rule in Ladd v Marshall applies in the usual manner and the Respondent failed to satisfy the first condition.

26.  Further, given that the 3 pages of the Annual Report that the Respondent seeks to adduce on appeal were not established to be part of the working papers, we do not consider that their admission as evidence would affect the outcome.

27.  Hence, the second condition in Ladd v Marshall is also not met.  

28.  For the above reasons, we reject the Respondent’s application to adduce new evidence on appeal.  The summons of 9 March 2020 is dismissed.

Costs

29.  We also order the Respondent to pay the Complainant’s costs in the summons.  We have considered the Complainant’s statement of costs.  Counsel, who has done most of the drafting of the court documents charged HK$40,000 in total, whereas the Complainant’s solicitors charged HK$122,840 for their time spent.  We find the time engaged by the solicitors[6] involved in the matter to be excessive.

30.  It is also unclear why the Complainant’s solicitors have charged a small amount of time for court appearances when this application is being disposed of on paper without a hearing.

31.  Even taking account of the Complainant’s point that the Respondent belatedly abandoned a very substantial part of his application, we find the total costs charged by the solicitors and its staff to be excessive.  We shall fix the costs of the Complainant summarily at HK$80,000.  We order that the Respondent pay the Complainant’s costs accordingly.