FACV 10/2017 IN THE COURT OF FINAL APPEAL OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION FINAL APPEAL NO.10 OF 2017 BETWEEN The Registrar of the Hong Kong Institute of Certified Public Accountants Complainant (Respondent) and Wong Tak Man Stephen 1 st Respondent (1 st Appellant) RSM Nelson Wheeler 2 nd Respondent (2 nd Appellant) SUPPLEMENTAL CASE OF THE APPELLANTS GPI Question 1 Respondent s Argument: wrong charge issue not covered by GPI Question 1 1. In rejecting the Appellants argument that the Respondent s complaint was in reality concerned with an alleged breach of RA/30, 32, 36/ 4.14, 21, 23
HKSA 700 (regarding the forming of auditor s opinion), CA held that HKSA 700 nonetheless was tied up with HKAS 39 and that their adoption of the wrong interpretation of HKAS thereby constituted a breach of s.34(1)(a)(vi): see CA s Judgment 4.14, 21 and 23. 2. GPI Question 1 addresses the issue whether such wrong interpretation of an accounting standard by itself constitutes a breach of s.34(1)(a)(vi). Contrary to 19 of the Respondent s Written Case ( R s Case ), it relates to the Appellants argument that the Complaint was defective. Merits of GPI Question 1 3. The Respondent s argument (at R s Case 20-24) is a nonsequitur and begs the question of how failed or neglected in s.34(1)(a)(vi) should be interpreted. 4. Particularly, the Respondent s assertion (at R s Case 23) ignores the fact that directors who are members of the Institute are obliged to ensure full understanding of the Hong Kong Financial Reporting Standards ( HKFRSs ) (which include the HKASs) by nonmember fellow directors and other officers, and to use their best endeavours to ensure observance of HKFRSs: Preface to the HKFRSs 22. Here, Heng Tai s director (Mak Yun Chu) was a certified public accountant at the material times. 2
5. The Respondent s references to the textural and historical matters (R s Case 34-52) are immaterial:- (1) The references (at R s Case 34-42) to the various types of complaint in s.34(1)(a) shed no light in interpreting failed or neglected in s.34(1)(a)(vi). Here, the Appellants did apply HKAS 39 and the complaint was only as to its correct interpretation. The fact that negligence or dishonesty is an express element in other subsections does not mean that a misinterpretation by itself constitutes failing or neglecting to apply the standard. (2) The phrase without reasonable excuse (R s Case 44) merely provides for a defence after the elements of the particular complaints have been established. The absence of this phrase in s.34(1)(a)(vi) does not mean that an auditor who (in light of the diversity in practice) reasonably came to a view of HKSA 39 which differed from that of the DC thereby fails or neglects to apply the standard. (3) The focus on the word required (R s Case 45-46) in no way explains the proper meaning of failed or neglected. (4) The objective of the practice review (R s Case 48-50) does not imply that s.34(1)(a)(vi) is targeting a reasonable interpretation of any particular standard having regard to the diversity of practices. 3
6. The Respondent does not dispute the scope and standard of an auditor s legal duty set out at 24-29 of the Appellants Written Case ( Apps Case ), and in particular, the auditor s legal duty to exercise reasonable care and skill in arriving at his opinion: Apps Case 29. 7. Contrary to the Respondent s submissions (R s Case 42-43) these standards are highly relevant in the present context:- (1) They explain the true nature of an auditor s duty and form part of the context against which failed and neglected fall to be interpreted. (2) S.34(1)(a)(vi) should, where possible, be construed consistently with such standards. So read, an auditor who actually adopts a reasonable interpretation would not be failing or neglecting to apply the same. (3) An analogy to s.34(1)(a)(vi) is s.21 of the Oaths and Declaration Ordinance, Cap.11, under which certain legal consequences arise where a person declines or neglects to take an oath duly requested. The Appeal Committee held that oath-taker would not have declined or neglected to take the requisite oath where the mistakes were inadvertent: The Chief Executive of the HKSAR v Yau Wai Ching, FAMV 10/2017 (1.9.17) 28. The relevant context may militate against the interpretation of a duty in an absolute fashion. 4
(4) The word failed in s.34(1)(a)(vi) likewise imports culpability. CA in Dr Wu Daniel Yiang v The Medical Council of Hong Kong, CACV 162/2013 (15.12.14) held that a defendant facing a charge of failing to properly advise would assume that he was being prosecuted for neglectful failure, meaning neglectful failure to provide the standard of advice that was required by his profession ( 37, 45). Thus, the words failed or neglected are capable of accommodating the common law standard of reasonable care and skill. (5) Conversely, if the Respondent s argument were accepted, s.34(1)(a)(vi) would then have the effect of elevating the legal duty of an auditor above and beyond the wellestablished reasonableness standard. Such result is not necessitated by a natural reading of failed or neglected. (6) The above propositions are consistent with the fact that, HKSA700.11 and 700.13, being auditing standards relating to the forming of audit opinion, make no reference at all to any requirement that the opinion must be a correct one. 8. The above is consonant with the Appellants argument before CA on the proper meaning of failed or neglected. 1 CA, however, rejected the argument, holding that it was sufficient to convict the 1 See the Appellants argument before CA quoted at 4.22 of the CA s Judgment: Response to the Complaint 4-5. 5
Appellants for merely wrongly agreeing with the view of Heng Tai : CA s Judgment 4.23. The argument that s.34(1)(a)(vi) imports culpability is not a new point (as alleged at R s Case 32). RA/36/ 4.23 The concept of mens rea (R s Case 53-73) 9. Our case is that s.34(1)(a)(vi) requires an element of culpability (be it neglectful failure or something more serious). 10. We further respond briefly on the topic of mens rea:- (1) The civil nature of disciplinary proceedings is not inconsistent with the importing of culpability. (2) Here, strict or absolute liability merely refers to a type of liability devoid of culpability. (3) Even in the Canadian context, the courts have recognised that a strict or absolute disciplinary charge admits a defence of due diligence: e.g. Ontario (Director, Racing Commission) v Durham [2016] OJ No. 2445; Merchant v Law Society of Saskatchewan [2014] SJ No.245 and (2009) SKCA 33. (4) The maximum sanctions under s.35(1) upon conviction of s.34(1)(a)(vi) are truly penal in nature. These include:- (a) a removal or cancellation order; and 6
(b) financial penalty up to HK$500,000 (not linked to the harm caused by the breach). As held in Koon Wing Yee v Insider Dealing Tribunal (2008) 11 HKCFAR 170 ( 38), proceedings were properly classified as criminal where the penalties were intended to be severe and to have a deterrent effect. 2 That said, it is unnecessary to resort to the criminal nature of disciplinary proceedings in the present context. (5) Kao, Lee & Yip, in the context of civil contempt of failing or neglecting to obey a court order, shows that these two words do not necessarily import strict or absolute liability. (6) Having regard to the segregation of roles and responsibilities between an auditor and management of an entity being audited, the auditor would not have failed or neglected to apply an accounting standard by reasonably forming an interpretation of HKSA 39 (in light of the diversity of practices), which happened to be different from that of DC. S.34(1)(a)(vi) requires the proof of an appropriate degree of culpability, e.g. the auditor has intentionally disregarded, or turned a blind eye or (at the very least) unreasonably failed to have regard to the standard in question. 2 Also R v Wigglesworth [1987] 2 SCR 541, where the Canadian Supreme Court held that the true penal consequence test prevails over the by nature test if in conflict, recognizing that disciplinary proceedings may attract penal consequence even if not criminal in the strict sense. 7
GPI Question 2 Respondent s argument: no basis to import reasonableness 11. We refer to the discussion of GPI Question 1 above and further respond as follows:- (1) The fact that s.34(1)(a)(vi) may significantly overlap with s.34(1)(a)(iv) and (viii) does not render the former redundant. S.34(1)(a)(vi) covers a variety of standards, some relevant to an entity (e.g. HKAS 39) and others to an auditor (e.g. HKSA 700). An entity s failure to comply with a standard does not automatically translate into a breach of s.34(1)(a)(vi) by the auditor. One must consider the entity s failure against the auditor s duty of reasonableness and the specific duties under HKSAs (including HKSA 700) in determining the auditor s liability under s.34(1)(a)(vi). It is conceivable that conduct which does not constitute professional negligence or misconduct may nevertheless amount to a breach of a specific statutory standard. (2) A Solicitor (R s Case 80-82) is distinguishable. That case is not concerned with misinterpreting a standard but a law firm s error of judgment on its promotional materials resulting objectively in misleading the public, which the tribunal was entitled to find. 8
Respondent s argument: Appellants acted unreasonably 12. Neither DC nor CA found that the Appellants had acted unreasonably when subscribing to Heng Tai s view. Nor was the charge formulated on the basis of the Appellants unreasonableness. 13. To so argue in this appeal would render the Respondent s conduct wholly unfair: see Sin Chung Yin Ronald 22, 90; The Registrar of the HKICPA v X, CACV 244/2016 (20.10.17) 22-24. GPI Question 3 14. Interpretation of HKAS 39 is not a technical matter exclusively for DC: (i) it is a matter of law; (ii) the Institute has not issued any authoritative interpretation and there had been diversity in practice; and (iii) the majority of DC are neither professional accountants nor lawyers. 15. The Respondent s interpretation ignores the following relevant features of HKAS 39:- (1) As the title to 58-70 suggests, impairment is related to uncollectibility. For equity instruments, this is equivalent to the irrecoverability of the cost of the investment: see the first example in 61. RB/151-154/ 58-70 (2) The measure of such irrecoverability is the extent to which 9
the estimated future cash flows of the financial asset in question have been adversely affected: see 59; the first example in 61; 66. (3) Such measure must be capable of being reliably estimated : see 59. (4) A decline in the fair value of an investment in an equity instrument below its cost may or may not constitute a loss event or evidence of impairment, since the entity s future cash flows may or may not be adversely affected. This depends on the reason for the decline and is a matter of degree and duration: see 60, 61. (5) In this case, the reason for the decline was that there was a temporary market event which affected numerous entities (i.e. a financial crisis) but there was no evidence that the fundamentals of the subject entity were adversely affected. The temporary nature of the general market decline did not indicate that Heng Tai s future cash flows would necessarily be affected when the China Zenith shares were to be sold (or that their cost would be irrecoverable). 16. CA has sought to de-construct of HKAS 39.59 in the manner set out at R s Case 113-117. This approach is not only contrary to the above features; it is blatantly ungrammatical. 17. Further, the following matters are highlighted:- 10
(1) The Respondent misinterprets BC 107 (which is not part of HKAS 39): R s Case 129(2). Impairment triggers is a reference to the examples of types of [loss] events set out in HKAS 39.59 and 39.61. The examples of events in 39.59 were mainly concerned with debt instruments, though not exclusively e.g. example (e). This is why BC 107 points out that those [referring to these examples] specified in [39.59] focus on debt instruments. This does not mean that the first part of 39.59 excludes equity altogether. RB/157/ BC107 (2) The Respondent in fact recognizes the Cash Flow Condition by calling it impact requirement : R s Case 129(3). There, he argues that this Condition is satisfied because there will be a significant impact on the expected cash flow arising from the shares when they are sold. This is where the Respondent s case breaks down because, in this case, there was no evidence that the cost of investment was irrecoverable: Apps Case 8-9. This wholly negated any prediction of a significant impact on the expected cash flow when the equity instrument is sold, as the Respondent now claims. Dated the 24 th day of November 2017 Johnny Mok SC Adrian Lai Counsel for the Appellants 11