Hong Kong audit regulator says it expects full compliance with laws and regulations

The AFRC stated that as the independent regulator of the accounting profession in Hong Kong, it expects all audit firms and their staff to fulfil the fundamental principle of professional conduct in order to comply with all relevant laws and regulations in accordance with paragraphs 110.1 A1(e) and R115.1(a) Code of Ethics for Professional Accountants (code).

It was highlighted that in a recent decision notification, the Supervision and Evaluation Bureau of the Ministry of Finance of the People’s Republic of China imposed a sanction on an individual auditor for auditing mainland enterprises listed in Hong Kong on his own account rather than through the mainland audit firm to which he belonged, as required by mainland law.

In accordance with paragraphs 110.1 A1(e) and R115.1(a) of the Code, an accountant is expected to (i) comply with applicable laws and regulations; (ii) act in a manner consistent with the profession’s responsibility to act in the public interest in all professional activities and business relationships; and (iii) avoid any conduct that the accountant knows or should know is likely to discredit the profession.

AFRC reminded Hong Kong audit firms that “the basic principle of professional conduct requires that they have thorough knowledge of and strictly comply with applicable laws and regulations of all jurisdictions in which they operate or provide audit services, including those on the continent, as well as all requirements set out in the “Temporary Regulations on Accounting Firms Providing Audit Services for the Offshore Listing of Enterprises in Mainland China (Temporary Provisions) Regulating the Provision of Audit Services by Hong Kong Audit Firms to Mainland China Enterprises Listed in Hong Kong.”

Temporary regulations that came into effect on July 1, 2015 prevent foreign auditors from auditing mainland China companies unless they enter into a cooperation agreement with a mainland China public audit firm. There is an exception that allows auditors based in Hong Kong, Macau and Taiwan to audit mainland China companies that wish to list or are already listed on a stock exchange in one of the three jurisdictions. However, auditors are expected to follow the rules set out in the regulations.

The note stated that “Compliance is a legal obligation and a fundamental pillar of responsible and sustainable practice”. It says that the AFRC “do not hesitate to hold companies and their staff accountable by taking strong enforcement action if they fail to do so“The document also states that when considering applications for registration as auditors of public interest entities (PIE) and renewals of registration, the AFRC may take into account all information in its possession, including the applicant’s compliance records.

Previous warnings

This warning is reminiscent of the first AFRC report on the Hong Kong PIE audit market published in March 2024, which highlighted the high vacancy and attrition rates in the industry and highlighted the importance of continuing professional development (CPD) training in the context of audit quality (see Hogan Lovells alert Disciplinary and litigation risks – AFRC highlights skills gap in public interest entity audits in Hong Kong). The results were made against the backdrop of a trend of clients putting pressure on fees to reduce, which likely led some auditors to feel they had no choice but to economize on the resources and effort they allocate to the task.

Earlier in its 2023 Supervisory Report, the AFRC noted high levels of non-compliance in the reporting of CPD training, a lack of consultation on anti-money laundering (AML) and counter-terrorist financing (CTF) guidance, and a delay in updating professional conduct standards (see Hogan Lovells alert Tick the boxes – Hong Kong accounting regulator highlights professional training compliance shortcomings).

Focus on standards

AFRC seems to attach particular importance to compliance and standards and takes every opportunity to highlight their importance in its public communications (which should come as no surprise given the current climate).

The AFRC’s reiteration of expectations is consistent with the approach of the SFC and the Insurance Regulatory Authority, with these regulators already fully committed to actively monitoring the entities they regulate in Hong Kong for possible breaches of mainland China laws and regulations as they attempt to attract or even develop new business in highly regulated sectors in mainland China.

Needless to say, auditors should ensure that they uphold the highest standards of professional conduct, seek advice and provide staff with training on professional ethics and risk management, and ensure that any work they undertake complies with relevant rules and regulations, especially if the audit is cross-border in nature.