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Liability reform

1.

The work of the Hong Kong Institute of CPAs in relation to Professional Liability Reform in Hong Kong includes the introduction of corporate practices for CPAs (which became effective since 2 August 1996 ) and advocating three proposals for liability reform that will safeguard Hong Kong's position as a global financial centre.

 

The Institute's three proposals are:
the introduction of proportionate liability;
amend section 165 of the Companies Ordinance to remove the prohibition on auditors from contractually limiting liability with clients in respect of audit work; and

the introduction of Limited Liability Partnerships (LLPs).

   
2.

The Institute's Paper dated 14 March 2005 "A Case for Professional Liability Reform in Hong Kong"

The Institute released on 14 March 2005 a Paper "A Case for Professional Liability Reform in Hong Kong " which explains why the Institute's three liability reform proposals should be introduced in Hong Kong to safeguard its position as a global financial centre in the public interest.

The Institute's Paper comprises four parts:
(i) The Main Paper which has an Executive Summary and a full discussion on why the Institute's three liability reform proposals are necessary. The Institute is of the view that the current liability framework no longer fits the nature of the work expected of professionals in Hong Kong, the scale of the funds involved and the cross border responsibilities and liabilities now being faced.
(ii)

Annex I attaches the Institute's submission dated 16 April 2002 "Proposal for an Equitable System of Liability" to the Government which advocates a system of proportionate liability to address concerns over the joint & several liability framework.

(iii)

Annex II attaches the Institute's submission made on 17 October 2003 in response to the Government's Standing Committee on Company Law Reform's Consultation Paper of its Corporate Governance Review on "Auditors' Liability".

(iv)

Annex III attaches the Institute's submission dated 25 November 2004 to the Government advocating the introduction of LLPs in Hong Kong to address the issue of joint and several liability faced by general partnerships.

 

 

The Institute adamantly believes that Hong Kong 's liability framework has not evolved in step with developments in the economic, financial and litigious environment in which its members are currently practising and is no longer appropriate to the nature of work performed by professionals in Hong Kong.

The Institute's Paper sets out the imperatives which have driven the need for change are:

Hong Kong has transformed itself over the last ten years from a local financial centre to a global financial centre.

Globalization results in the need for an appropriate liability framework for the business and other risks arising from cross border transactions.
The increased internationalization of commerce has resulted in the development of an increasingly litigious environment while Hong Kong does not provide the legal protections available in other similar jurisdictions.
Hong Kong is the focus of fund raising for mainland enterprises, creating an increase in the volume and scale of assurance work whilst the liability framework remains unchanged.
Adequate insurance cover is becoming increasingly scarce and the collapse of one or more of the major accounting firms, which Enron/Andersen graphically demonstrated can happen, would have an extremely damaging effect on everyone with an interest in a healthy financial market.
Most sophisticated jurisdictions have or are introducing liability reforms. If Hong Kong is left behind, Hong Kong will be less attractive to talented individuals which will inevitably reduce its competitiveness as a global financial centre.
Uncertainties regarding the future of the profession will make recruitment and retention of the best people more difficult.
   
 
PROFESSIONAL LIABILITY REFORM IS NOW VITAL FOR HONG KONG
   
 
( Chinese version of the Executive Summary is available here )
   
3. The Institute's continuing efforts for Professional Liability Reform

The Institute made a submission commenting on the Department of Justice LC Paper No. CB(2)1371/05-06(01) on Limitation of Liability and attended the meeting of the LegCo Panel on Administration of Justice and Legal Services on 27 March 2006 to emphasise the urgency and importance of professional liability reform.

In the submission, the Institute urges a reconsideration of the Administration’s decision to suspend further studies into professional liability reform proposals for the remainder of the Chief Executive’s term of office. The Institute’s submission rebuts statements in the Department of Justice’s paper and stresses that professional liability reform is too important to Hong Kong to defer until some unspecified future time.