Circular of the Ministry of Finance on Printing and Issuing the Measures for the Administration of Professional Risk Funds of Accounting Firms

Cai Kuai Han [2007] No. 9

March 1, 2007

To the financial departments (bureaus) of all provinces, autonomous regions, and municipalities directly under the Central Government, and Shenzhen Financial Bureau,

With a view to standardizing the administration of the professional risk funds of accounting firms, promoting accounting firms to strengthen their awareness of professional liability risks, and enhancing their capabilities of resisting professional liability risks, we, in accordance with the Law of the People's Republic of China on Certified Public Accountants, worked out the Measures for the Administration of Professional Risk Funds of Accounting Firms and hereby printing and issuing them for implementation as of the date of Printing and Issuing.

Appendix: Measures for the Administration of Professional Risk Funds of Accounting Firms

Article 1 With a view to standardizing the administration of the professional risk funds of accounting firms, promoting accounting firms to strengthen their awareness of professional liability risks, and enhancing their capabilities of resisting professional liability risks, we worked out these Measures in accordance with the Law of the People's Republic of China on Certified Public Accountant.

Article 2 A firm shall withdraw and use the professional risk funds in accordance with these Measures. The professional risk funds of the branch of a firm shall be uniformly withdrawn and used by the firm.

Article 3 A firm shall, at the end of each year, withdraw not less than 5% of the business revenue audited in the current year as the professional risk funds.

Article 4 A firm may, by means of purchasing a professional insurance, enhance its capability of resisting professional liability risks. Where a firm purchases a professional insurance, the insurance premium actually paid by it may be calculated and used to offset the amount of the professional risk funds that shall be withdrawn in the year of insurance benefit in accordance with the following formula: the deductible amount = the insurance premium borne in the current year × 15. Where the deductible amount is more than or equal to the amount of the professional risk funds that shall be withdrawn in the current year, no professional risk funds needs to be withdrawn in the current year. Where the deductible amount is less than the amount of the professional risk funds that shall be withdrawn in the current year, a professional risk funds shall be withdrawn on the basis of the difference. Where a firm offsets the amount of the professional risk funds that shall be withdrawn with the insurance premium, it shall, before May 31 of each year, submit a photocopy of the insurance policy (including insurance clauses) to the local provincial financial department and institute of certified public accountants each for record.

Article 5 Where the international headquarters of a Chinese-foreign cooperative firm purchases a professional insurance uniformly, the firm shall, before May 31 of each year, submit the documents that are issued by the insurance institution and may prove the amount of the insurance premium paid by the firm in the current year to the Ministry of Finance and the Chinese Institute of Certified Public Accountants for record via the local provincial financial department.

Article 6 During the survival of a firm, professional risk funds may only be used as:
1. Civil compensations caused by professional liabilities; and
2. Legal expenses related to civil compensation such as retaining fee and litigious cost.

Article 7 In case of merger of limited firms, the merged parties shall incorporate the professional risk funds that have been withdrawn before the merger into the new firm.

Article 8 In case of division of a limited firm, the withdrawn professional risk funds shall be divided among the dividing parties in the distribution proportion of the net assets unless otherwise agreed on by the dividing parties.

Article 9 Professional risk funds shall not be distributed during the survival of a firm.

Article 10 With respect to the professional risk funds formed by a firm before separation and restructuring, where the firm signs an written agreement with the unit that it is affiliated to specifying that the part of professional risk funds will be left with the firm after separation and restructuring, the part of professional risk funds shall be incorporated into the professional risk funds forming after the separation and restructuring of the firm for uniform use and distribution.

Article 11 Where the professional risk funds formed by a firm before separation and restructuring is left with the firm after separation and restructuring except in the circumstances as specified in Article 10, the part of professional risk funds and the professional fund forming after separation and restructuring shall be separately accounted and shall only be used as civil compensation and relevant legal expenses incurred by the business before separation and restructuring. Where there is any balance of the part of professional risk funds during liquidation, the firm shall refund it to the original unit that it is affiliated to. Where the original unit that the firm is affiliated to does not exist, the balance shall be turned over to the State Treasury.

Article 12 Except under the circumstances as specified in Article 11, a firm shall incorporate professional risk funds into the scope of liquidation.

Article 13 Where a firm violates any provision of these Measures, the financial department above the provincial level shall order it to make corrections within a time limit and shall make an announcement if the firm fails to make corrections with the time limit.

Article 14 These Measures shall come into effect as of the date of printing and issuing.