LCQ2: Professional Liability System of the Accountancy Profession (4

Press release

LCQ2: Professional liability system of the accountancy profession

Wednesday, May 4, 2005

Following is a question by the Hon Tam Heung-man and a reply by the Secretary for Financial Services and the Treasury, Mr Frederick Ma, in the Legislative Council today (May 4):

Question:

The Hong Kong Institute of Certified Public Accountants has made a submission to the Government proposing a reform in professional liability to fortify Hong Kong's position as a global financial centre. In this connection, will the Government inform this Council:

(a) whether it has considered the accounting profession's proposal to implement a proportionate liability system; if it has, of the progress made in implementing the system; if not, the reasons for that;

(b) whether it will amend the Companies Ordinance to repeal the provision which prohibits auditors from contractually limiting liability to clients in respect of audit work; if it will, of the time for making the amendment; if not, the reasons for that; and

(c) whether it will consider implementing a limited liability partnership system; if it will, of the time for implementation; if not, the reasons for that?

Reply:

Madam President:

First of all, I would like to point out that professional liability reform involves a wide range of complicated matters, including some fundamental legal principles. It does not concern just the accountancy profession, but also other professions as well as the interests of other stakeholders including their clients and creditors. As such, in considering the subject, we need to study the relevant matters carefully and comprehensively, taking into account the possible implications to parties that may be affected.

In its earlier submission to the Government, the Hong Kong Institute of Certified Public Accountants (HKICPA) has raised concerns about the liability for professional practice. Indeed, we note that similar concerns or views have also been expressed by some other professions. For example, the Law Society has submitted a paper on the Limited Liability Partnership (LLP) proposal to the Government. The relevant views and proposals touch on a wide range of matters. They do not affect just the legal liability of a particular profession, but also the interests of other relevant parties and the community as a whole.

Furthermore, the two proposals made by the HKCPA, namely the introduction of the proportionate liability system and LLP, were indeed discussed by the Legislative Council Panel on Administration of Justice and Legal Services on March 31 this year. At that meeting, representatives of the Department of Justice had explained the Government's position.

Proportionate Liability and LLP Proposals

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First, the introduction of proportionate liability will have a very far-reaching impact. Under this proposal, the well-known and well-established principle of joint and several liability of tort feasor would be replaced. This is a fundamental change of our general law of tort.

The introduction of the LLP would also have ramifications which go beyond a particular profession. The partnership as a business model is not limited to a particular sector. For many years, the partnership has been adopted by many small and medium size business undertakings across the board. It would be, neither rational nor fair, to introduce LLP for a particular sector. Other jurisdictions do not seem to have followed this route.

The two proposals concern not just the individual professions but also affect the interests of clients, creditors etc or even the general public. The effect is to shift some of the burden of risk from the professionals to their clients. The relevant questions would require careful consideration. Before undertaking a detailed assessment on the implications of the proposals to various parties and the general public and a research of the overseas experience, the Government is not in a position to give further comments.

As mentioned by the representatives of the Department of Justice at the Panel meeting on March 31, relevant bureaux and departments are examining the proposals with a view to preparing a paper for consideration by the Policy Committee. As we understand it, the Panel has also scheduled another meeting for May 23 to discuss the proposal to introduce the LLP.

Section 165 of the Companies Ordinance

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In her question, the Hon Mandy Tam referred to the provision in the Companies Ordinance that prohibits auditors from entering into contract with their clients to limit their liability in respect their audit works. This provision is modelled on a similar provision in the UK Companies Act. In a nutshell, it prohibits a company exempting its auditor etc. from, or indemnifying them against, liability of the company or a related company in respect of such conduct as negligence in relation to that company or related company. However, the provision permits the company in certain circumstances (e.g. when the auditor has judgment in his favour in legal proceedings) to indemnify the auditor against any liability incurred by the auditor in defending any civil or criminal proceedings. The provision also permits the company to purchase insurance for the auditor in certain statutorily specified circumstances.

At present, some other jurisdictions whose company law systems are similar to that of Hong Kong, e.g. the United Kingdom and Australia, still have similar legislation. Any repeal of the provision may have wide implications. Moreover, the proposal is related to the above-mentioned reform in the professional liability system. We will keep in view of international developments in this respect, and review the need to amend section 165 of the Companies Ordinance after the completion of the study regarding professional liability reform.