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HOW COSO COULD AFFECT
COMPANIES IN HONG KONG
One of the obstacles to a truly global COSO framework was its focus on the
United States, as COSO was originally intended for domestic consumption
there. The new framework is written from a more international perspective
and is likely to make much more headway in Hong Kong.
PricewaterhouseCoopers, which undertook the project to manage the
update of COSO, created a global task force to broaden its appeal. “One of
the objectives was really to try [to] reposition it [away] from a U.S .-centric
framework, which it very much was in 1992,” says Megan Haas, Partner with
PwC in Hong Kong and a contributing author to the updated framework.
Unlike U.S . listed companies that need to strictly comply with COSO (or
an equivalent framework), there is no mandatory regulation in Hong Kong
for internal control implementation, says Roy Lo, Deputy Managing Partner
of ShineWing (HK) CPA and a Hong Kong Institute of CPAs member who has
presented COSO-related seminars to members.
Hong Kong-based companies that have shares traded in the U.S . and
followed the previous framework will be expected to follow the updated
framework. “It would be prudent for such companies to reassess their internal
control environments ahead of the transition in December 2014,” says Keith
Williamson, Managing Director and Asia Head of Global Forensic and Dispute
Services at Alvarez & Marsal and an Institute member who is an expert in COSO
According to the Rules Governing the Listing of Securities on The Stock
Exchange Of Hong Kong Limited, Section C 2.1 of Appendix 14: Code of Corpo-
rate Governance Practices requires that listed companies conduct an annual
review of the effectiveness of the system of internal control. “The code provi-
sion is not legally enforceable and companies may choose to deviate from it
by providing appropriate reasons,” Lo adds.
Certain rules and regulations in Hong Kong have already been revised in
response to the new framework, such as the Institute-issued Technical Bulletin
AATB 1 Assistance Options to New Applicants and Sponsors in Connection
with Due Diligence Obligations, including Internal Controls over Financial
Reporting. “This has been updated to include the 17 newly added COSO
principles,” says Lo.
In addition, the Institute recently released A Guide on Better Corporate
Governance Disclosure, which covers internal control, including the require-
ment for an annual review of internal controls to be conducted and how this
should be implemented.
Haas says COSO’s profile in Hong Kong has become higher in recent years.
However, data suggest a still-low level of recognition. A PwC survey in July
2013 of the annual reports of 1,368 Hong Kong-listed companies showed that
only 64 made an explicit reference to the COSO framework. It is possible that
more companies observe COSO guidance but fail to mention the framework.
“Many will have done something but they haven’t referenced which frame-
work,” says Haas.
Still, differences between the U.S . and Hong Kong are likely to pose chal-
lenges to integration. “ Since fraud usually involves concealment and commu-
nication fosters openness, one of the ways to expose fraudulent activities is to
establish a whistle-blowing policy.” says Gloria So, Manager with ShineWing
Risk Services and another COSO expert, noting that many U.S . companies
set up a confidential email or telephone hotlines for reporting on the kind of
misconduct covered by the COSO framework.
“However, the situation in Hong Kong or China is entirely different,” she
adds. “Whistle-blowing is not prevalent or generally accepted by society.
This is mainly due to the fact that Chinese culture is relationship-oriented
and such behaviour may be considered betrayal.”
have the support of two important U.S. reg-
ulators – the SEC and the Public Company
Accounting Oversight Board – which ob-
serve COSO’s deliberations. “Both were vo-
ciferous official observers to the [revision]
process,” says Hirth.
The two regulators provided invalu-
able help for the transition between the
two frameworks. “ The SEC and the PCAOB
urged us to come up with a transition
scheme, so we came up with this notion that,
as of 15 December, the old framework is go-
ing to be retired.
“As 80 percent of U.S. public companies
have a 31 December year end, that would
mean all of them reporting on Sarbanes-
Oxley as of 31 December 2013 have to use the
new framework [this year],” Hirth adds with
satisfaction. “ That was magic wording.”
The transition period for the new COSO
framework caused more than a few ripples
in U.S. corporate circles. “Some people said,
‘you can’t make me,’” says Hirth. “We said,
‘ you’re right,’ but we also reminded them
who the two official obser vers were and the
suggestions that they had made to us.
“ What [the SEC and PCAOB] came out
with were statements that said they were
aware that the COSO framework had
changed and they were aware of the tran-
sition guidance,” Hirth recalls. “ They said,
‘we’ll just watch that and if anything else
needs to be issued we will [issue it].’
“ That wasn’t good enough for a lot of
people,” says Hirth. “Now the most recent
comment that came out in November 2013
was that the longer [SEC] registrants con-
tinue to use the 1992 framework, the more
questions they will be asked as to why they
have not changed when a more up-to-date
framework exists. That was, more or less,
the final nail in the coffin.”
Hirth accepts that the burden of compli-
ance could eventually be subject to a law of
diminishing returns. “Things always tend
to go a little too far and they get pulled back
and we’ll see,” he says of financial regula-
tion in general. “It’s a complicated area and
time will tell if the regulators go too far
overboard or not.”
Treadway Jr., in his 1992 commission
chairmanship, set the bar on reasonable
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