22 April 2016
Accounting Industry in Hong Kong
- The use of international standard accounting practices and rising business opportunities in the region have attracted the big international accounting firms to have a presence in Hong Kong. Most of them have set up their regional headquarters in Hong Kong to ride on such advantages as the sound regulatory framework, availability of accounting professionals and proximity to fast growing economies like the Chinese mainland and ASEAN countries.
- With companies increasingly globally focused, which affect their value chains as well as supply chains, big international accounting firms have to expand their operational scale to better serve their clients. Local accounting firms, many of which are small-scale operators, may find it increasingly challenging in serving their clients.
- Foreign nationals who have passed China’s National Accounting Examination are allowed to form partnerships or incorporated accounting firms on the mainland as per China’s WTO accession protocol. Aside from WTO liberalisation measures, Hong Kong’s accounting firms and professionals also benefit from the CEPA measures.
- The Mainland and Hong Kong governments signed the Agreement on Trade in Services in December 2015 in respect of applying liberalisation measures for Hong Kong service suppliers and professionals on the mainland from June 2016.
- Hong Kong’s exports of accounting, auditing, book-keeping and tax consulting services amounted to US$195 million in 2014, up marginally from the 2012 levels.
Range of Services
Major services provided by certified public accounting (CPA) firms are statutory audit services, tax advisory, company listing, corporate finance, company secretarial, liquidation and due diligence services. Although statutory audit work is still a major source of income for the accounting profession, CPA firms also provide a full range of business advisory services to their clients such as financial planning, corporate management and internal audit.
Non-CPA firms offer services like bookkeeping, general accounting services, year-end financial reporting, tax filing and company secretarial work.
The industry is dominated by a few international firms. The world’s "Big Four” accounting firms hold a dominant share of the market in terms of professional fees earned. They provide audit services for the vast majority of blue chips and other large enterprises listed on HKSE. Other accountancy firms, including the second-tier international accountancy firms and local Hong Kong CPA firms, mainly serve the local and mainland companies of smaller sizes.
Accountants have organised themselves into professional societies. Most of the accounting professionals in Hong Kong are members of the Hong Kong Institute of Certified Public Accountants (HKICPA) (formerly known as Hong Kong Society of Accountants), a self-regulating body governing the professional conduct of accounting professionals in Hong Kong. According to HKICPA, its total membership number reached 38,699, while practising members increased to 4,393 as at end-June 2015.
HKICPA members are accorded recognition on five continents. HKICPA has signed agreements with the chartered accountant institutes of:
- England and Wales;
- New Zealand;
- South Africa;
- Zimbabwe; and
- National Association of State Boards of Accountancy / American Institute of Certified Public Accountants International Qualifications Appraisal Board of the U.S., Association of Chartered Certified Accountants, CPA Australia and Association of International Accountants, for access to membership in their institutes and practising rights in their countries.
Hong Kong's exports of accounting services amounted to US$195 million in 2014. The Chinese mainland is the biggest export market for Hong Kong’s accounting services. Major export services include: statutory audit services, investment-related advisory services (e.g. due diligence), tax advisory and corporate advisory services.
The clients requiring accounting services on the mainland can be broadly divided into four types, namely multinational corporations, Hong Kong companies which have invested or intend to invest on the mainland, Hong Kong-listed mainland enterprises and mainland enterprises expanding overseas.
Industry Development & Market Outlook
In April 2014, China’s Ministry of Finance (MOF) proposed new rules to regulate foreign accounting firms to perform audits for mainland firms planning to list offshore, triggering concern over a potentially adverse impact on Hong Kong accounting companies. After the MOF discussed with the Hong Kong government and the accounting sector, it was decided that Hong Kong audit firms would be exempted from the new rules on mainland companies’ offshore listings, provided that certain the conditions were met. The exemption would apply to audits of mainland companies applying to list, or are already listed, on the stock exchange in Hong Kong, of which at least 50% of the shares are held by Hong Kong investors. However, Hong Kong audit firms are still subject to the rules' ban on taking audit working papers out of the Chinese mainland, and sending their staff to audit mainland companies under a temporary licence.
China’s World Trade Organisation (WTO) Accession
In its WTO accession, China made substantial concessions on foreign investment in the services economy. Market access commitments in relation to the accounting sector are as follows:
- Partnerships or incorporated accounting firms are allowed for CPA firms licensed by Chinese authorities.
- Foreign accounting firms can affiliate with their Chinese counterparts and enter into contractual agreements with their affiliated firms in other WTO members.
- Foreign nationals who have passed the Chinese national CPA examination are allowed to form partnerships or incorporated accounting firms.
Closer Economic Partnership Arrangement between Hong Kong and the Mainland (CEPA)
In addition to the mainland’s WTO liberalisation, Hong Kong’s accounting sector and professionals benefit from the CEPA agreement signed with the mainland. In general, CEPA does not include significant market liberalisation measures for Hong Kong's accounting firms and professionals. For smaller Hong Kong accounting firms, the main option for them to serve the mainland market is via the Temporary Audit Business Permit. Under Supplement V to CEPA, which took effect from January 2009, Hong Kong accounting firms which conduct auditing business on a temporary basis on the Chinese mainland can apply for a “Provisional Licence to Perform Audit-Related Services” with the validity period extended from two years to five years. This helps reduce the administrative burden for Hong Kong accounting firms compared with the requirements which otherwise apply to non-CEPA beneficiaries.
After ten annual Supplements to keep widening and broadening the liberalisation measures in favour of HKSS, Hong Kong and the mainland entered into a subsidiary agreement under CEPA in 2014 to achieve basic liberalisation of trade in service trade in Guangdong (“Guangdong Agreement”). This was then followed in December 2015 by the Agreement on Trade in Services (“ATIS”) to extend the coverage of the 2014 agreement from Guangdong to the rest of the mainland. Unlike the Supplements which adopted a positive-list approach to introducing liberalisation measures, the two latest CEPA agreements adopt a hybrid approach to granting preferential access to Hong Kong using both positive and negative lists. The ATIS, which covers and consolidates commitments relating to liberalisation of trade in services provided in CEPA and its Supplements and also the Guangdong Agreement, will be implemented from June 2016.
Hong Kong professionals who have obtained the Chinese Certified Public Accountants (CPAs) qualification are allowed to become partners of partnership firms on the mainland, and are further allowed to apply to become partners of accounting firms on the mainland, with the length of auditing experience acquired in Hong Kong treated as equivalent to that on the mainland. These measures build on those under Supplements IX and X, where the applications for becoming partners were confined to Qianhai, Pingtan and Guangdong. Details of the preferential access concerning the accounting services sector can be found at this website.
Mainland Standards Convergence
In recent years, there have been an increasing number of CPA firms / international affiliates and their clients entering the mainland market. In December 2007, the HKICPA signed joint declarations with the China Accounting Standards Committee and the Chinese Auditing Standards Board in relation to the financial reporting and auditing standards in Hong Kong and the Chinese mainland.