LEGCO QUESTIONS

Monitoring of the use of public funds and conduct of commercial activities by funded institutions

18 May 2016
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Following is a question by the Hon Kenneth Leung and a reply by the Secretary for Education, Mr Eddie Ng Hak-kim, in the Legislative Council today (May 18):

Question:

Recently, the media have made known to the public a huge number of confidential documents leaked from a Panamanian law firm, and some of such documents show that currently three Hong Kong institutions funded by the University Grants Committee (UGC) (funded institutions) have set up offshore companies to conduct commercial activities. Given that the extent of information about offshore companies disclosed by such institutions in their financial statements is different, there are queries that those institutions have concealed some information. Regarding the monitoring of use of public funds and conduct of commercial activities by funded institutions, will the Government inform this Council whether it knows:

(1) the respective numbers of locally and non-locally registered companies with shares held by each funded institution in the past five years; the information about each company (including the name, date of incorporation, place of registration, list of directors, major business and principal shareholders of the company, as well as the purpose of setting up the company), and whether the institutions have disclosed key information about such companies in their annual reports and financial statements; if it knows, of the details;

(2) if UGC has, apart from examining the financial statements submitted regularly by various funded institutions, monitored through other channels the use of public funds by various funded institutions; if UGC has, of the channels concerned; if not, the reasons for that;

(3) if UGC has currently put in place a mechanism and formulated guidelines for regulating matters relating to the ways in which funded institutions use public funds on investment activities and set up companies to conduct commercial activities; if UGC has, of the relevant mechanism and guidelines; if not, the reasons for that;

(4) given that some funded institutions have not provided detailed information about their non-locally registered companies in their financial statements, whether UGC has plans to require those institutions to make public such information to facilitate monitoring by the public; if UGC does, of the details of such plans; if not, the reasons for that; and

(5) if UGC has plans to review and standardise the mechanism for declaration of engagement in commercial activities by various funded institutions, so as to enhance the transparency of institutional governance; if UGC does, of the details of such plans; if not, the reasons for that?

Reply:

President,

(1) According to the information provided by the University Grants Committee (UGC)-funded institutions, the details of the subsidiaries set up by them in the past five years are at Annex. Lingnan University has not set up any subsidiaries.

(2) and (3) The eight UGC-funded institutions are independent statutory bodies, each with its own ordinance and governing council. Each institution has its own objectives, functions and governance structure in accordance with its own governing ordinance and statutes. In addition, the governing council is the supreme governing body over all institutional matters, having powers to acquire, hold and dispose of interests in other corporate bodies and take part in forming corporate bodies, and to invest its funds in such manner and to such extent as it thinks necessary or expedient, etc.

That notwithstanding, in view of the significant funding the institutions receive in the form of Government subvention and private contributions, as well as the importance of higher education to the development of the society, institutions should ensure that their funding is put to appropriate use and serve the best interests of the community and students. While safeguarding academic freedom and institutional autonomy, institutions should endeavor to maintain transparency and accountability in their operations.

The UGC Notes on Procedures (NoP) clearly set out the principle of no cross-subsidisation of UGC resources to non-UGC-funded activities. As a general principle, costs that can be directly attributed to the UGC-funded activities or the non-UGC-funded activities should be charged directly to the respective activity. To avoid hidden subsidy to non-UGC-funded activities, institutions should also levy overhead charges on such activities, including projects/programmes conducted by the self-financing subsidiaries or associates of the institutions.

The NoP also clearly set out the requirements on institutions’ financial reporting, audit and assurance. In preparing their financial statements, institutions should follow the prevailing Hong Kong Financial Reporting Standards (HKFRS) issued by the Hong Kong Institute of Certified Public Accountants and the Statement of Recommended Practice for the UGC-funded Institutions (the SORP). As far as audit and assurance are concerned, in addition to the annual audit of the financial statements, institutions are required to engage independent external auditors to provide an assurance as to whether an institution has accounted for the income and expenditure in respect of the funds received from the UGC (including recurrent grants, earmarked grants for specific purposes, etc.) in accordance with the relevant provisions of the NoP and the grant allocation letters issued by the UGC. Moreover, to provide further assurance of the proper use and application of public funds as represented in the audited financial statements and the annual return, Heads of Institutions are requested to provide a Certificate of Accountability to the UGC annually, after the close of each financial year, to confirm that public funds allocated via the UGC and matched donations under the Matching Grant Schemes had been spent in accordance with the NoP, allocation letter and other guidelines and approved Government policies, including the guidelines on no cross-subsidisation.

The UGC established the Financial Affairs Working Group (FAWG) in 2011 to review institutions’ finances, covering amongst others the cost allocation of UGC-funded and non-UGC-funded activities. The FAWG pointed out in its report issued in 2013 (the report is accessible on UGC’s website) that though the exercise was not an audit, it was noted in the report that during the course of the review, nothing had come to the FAWG’s attention that would suggest that there are glaring irregularities in the financial governance of the institutions. The FAWG considered that there was room for improvement in the cost allocation practices and the level of financial transparency in institutions, and put forward nine recommendations which covered these two areas. As a result, an updated version of the SORP and a new set of Cost Allocation Guidelines for the UGC-funded and the Non-UGC-funded Activities (the Guidelines) were promulgated to institutions in 2015. Institutions are expected to implement the different requirements by phases. The UGC believes that through the provisions in the SORP and the Guidelines, institutions could provide greater assurance to the public that the use and application of public funds is appropriate.

(4) and (5) According to the HKFRS, entities that have an interest in a subsidiary, a joint arrangement, an associate or an unconsolidated structured entity should observe the requirements on the “Disclosure of Interests in Other Entities”. Among others, it sets out the details that an entity shall disclose for each of its subsidiaries that is material to the reporting entity such details, including (a) the name of the subsidiary, (b) the principal place of business (and country of incorporation if different from the principal place of business) of the subsidiary, (c) the proportion of ownership interests held by non-controlling interests, etc.

Whilst some institutions chose to disclose all subsidiaries, others only disclosed principal subsidiaries. According to the institutions, in deciding whether information on individual subsidiaries (local / offshore) should be disclosed in the financial statements, they generally would consider the materiality of the investments in subsidiaries (such as the amount of investment involved, the level of business activities, etc). The external auditors of the institutions are of the opinion that the institutions’ consolidated financial statements give a true and fair view of the state of affairs of the institutions and of the consolidated entities in accordance with the HKFRS.

The Government and UGC understand the public’s wish for the institutions to enhance transparency and public accountability. In the spirit of institutional autonomy balanced with the need for public accountability, the UGC will shortly consider reviewing the reporting mechanism for investments and business activities conducted by institutions with a view to addressing the public’s concerns as soon as practicable.

Ends/Wednesday, May 18, 2016
Issued at HKT 18:55

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