Late resignations, lack of scepticism tarnish Hong Kong auditors’ credibility: regulator

Last-minute resignations and failure to recognise potential problems are the two major issues affecting auditors’ credibility in Hong Kong, according to the Accounting and Financial Reporting Council (AFRC).

Nearly a fifth of the investigations conducted on auditors were related to their late resignations, according to the audit regulator annual report on Wednesday.

“Late resignation of auditors is an issue, as listed companies may not have sufficient time to find a replacement, or the incoming auditors may be appointed at the last minutes before the reporting deadline,” Janey Lai, CEO of the AFRC, said at a media briefing to share the findings of the annual investigation and compliance report.

“The AFRC urges incoming auditors to place emphasis on analysing the audit implications of the circumstances leading to the outgoing auditors’ resignation and assessing their capabilities before undertaking the engagement.”

The report, the fourth since 2019, reviewed financial statements, highlighted the shortcoming of auditors and provided suggestions on making improvements.

The council received a record 190 complaints against auditors or on accounting issues for the financial year ended March 31 and carried out 77 investigations. Complaints numbered 185 in the previous year, 101 in 2022 and 67 in 2019.

Florence Wong, head of investigation and compliance of AFRC, said the number of complaints rose last year because of the council’s expanded power and scope of investigations.

Asked about the council’s investigation into PwC’s audit work related to the now collapsed China Evergrande Group, chairman Kelvin Wong Tin-yau declined to comment on the status of the investigation, saying it was still ongoing.

On the overall quality of Hong Kong’s auditors, Wong said the latest review showed accountants have failed to maintain professional scepticism and comply with the requirements imposed by the regulator.

“The quality of auditors is vital to Hong Kong’s standing as an international financial centre, as we need to maintain the confidence of investors,” Wong said.

Big institutional investors rely on auditors as gatekeepers to make sure the financial disclosures are of the highest standards, he said, adding that investors depend on reliable information to make long-term investment decisions.

The AFRC’s report found that financial reporting and audit quality has been consistently improving since the review first started in 2019, noting that most of the financial misconduct was related to poor corporate governance.

“Identifying the cause is the first step to addressing misconduct, which includes examining the corporate governance of firms and ensuring a proper tone has been set by the leadership to foster a culture of quality auditing,” CEO Lai said.