Hong Kong’s audit watchdog to start announcing investigations of ‘high public interest’, chairman says
- If we investigate a case that involves high public interest, then we should announce the investigation once we start the process, says FRC chairman
- The watchdog is investigating the financial reports and auditors of China Evergrande Group, Next Digital and Convoy Global Holdings
Hong Kong’s audit regulator will start announcing investigations in cases it views as of “high public interest”, its chairman said.
“If we are conducting an investigation in a case that involves high public interest, then we should keep the transparency high and announce the investigation once we start the process,” Kelvin Wong Tin-yau, the FRC’s chairman, said in an interview. “We did not have such disclosures previously, as most of the previous cases were not that high profile. We will keep this disclosure principle for our future investigations.”
The change in disclosure policy reflects the city’s efforts to step up the clean up any malpractice and to strengthen international investors’ confidence in what is Asia’s third-largest stock market.
Last month, the FRC said it was investigating China Evergrande’s 2020 accounts and their audit by PwC because it had concerns about the adequacy of reporting on whether it could continue operating as a going concern. The mainland Chinese developer faces more than US$300 billion in debt.
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In August, it said it would investigate whether Next Digital’s financial statements for the two-and-a-half years up to September 2020 contained any misleading public information. Next Digital is the publisher of the now-defunct newspaper Apple Daily. The regulator will also investigate its auditors – Deloitte Touche Tohmatsu in 2019 and CCTH CPA in 2020. Both gave a clean chit to Next Digital’s financial statements and later resigned.
The council’s first publicly announced investigation, however, came in February, when it announced that it had begun an investigation into Convoy Global Holdings’ financial statements and singled out its auditor, Zhonghui Anda CPA, for failing to raise a red flag on the financial advisory firm’s state of accounts.
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“The expansion of powers will allow us to have a complete picture … as many listed companies have operations or transactions with private companies,” Wong said.
The council, set up in 2006, will also be renamed as the Accounting and Financial Reporting Council after the change in law becomes effective in the fourth quarter of next year. Before that, the council will work with the Hong Kong Institute of Certified Public Accountants (HKICPA) to ensure a smooth power transfer.
Under the new law, the council will take over the HKICPA’s job of issuing licences on the 5,000 accountants who handle audit work. The HKICPA will, however, continue to issue licences for about 41,000 accountants who do not do audit work.
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“The expanding role of the council will help Hong Kong catch up with international trends, to have powerful audit regulators to oversee financial statements and auditors’ work,” said Louis Tse Ming-kwong, the managing director of Wealthy Securities. “However, the council would face some challenges, as it has a budget that is smaller than that of its international peers. It should review its expenses and manpower to ensure it can effectively carry out its duties.”
The Hong Kong government has given the council HK$400 million (US$51.6 million) in funding since 2019. It will start to charging investors, auditors and listed companies from January to finance its annual operating budget of HK$104.57 million.
This budget is far smaller than that enjoyed by Britain’s Financial Reporting Council, which had an operating budget of £39.6 million (US$53.4 million) for the year ending in March, and that enjoyed by the US’s The Public Company Accounting Oversight Board, which had US$264.9 million at its disposal.
