Auditing work on Hong Kong’s listed companies needs a “significant improvement” with almost three-quarters of inspections showing sub-par work, according to the accounting industry watchdog.
In inspections, 73% of the cases showed a need for “improvement” or “significant improvement,” the Financial Reporting Council said. More than 80% of the audits inspected showed instances of inadequate skepticism, the watchdog’s first annual inspection report after commencing a new regulatory regime showed.
“As such the quality of these audits was far below the standard that we expect and hence needs to be significantly improved by firms of all sizes,” FRC Chief Executive Officer Marek Grabowski said in a statement.
Inadequate work included insufficient challenges to key assumptions, business rationales and a lack of consideration to relevant facts and available evidence, the FRC said. Inspected engagements rated as “significant improvements required” are likely to be referred for enforcement action, including investigations or disciplinary action, according to the report.
Hong Kong was in April hit by trading suspensions of more than 50 companies after they failed to report earnings on time, some citing a dispute with their accountants.
Among the about 2,500 publicly traded companies in the former British colony, audit work was shared by fewer than 80 audit firms that fall under FRC supervision after the city moved from an industry self-oversight model in late 2019. As the city slowly recovers from pandemic and the political turmoil since 2019, the FRC is also facing added responsibilities in overseeing the audits of a bevy of Chinese firms that are listing in the city amid pressure to delist in the U.S.
Among the engagements inspected by the FRC were working papers concerning mainland Chinese firms available in Hong Kong, following a memorandum of understanding it signed with Chinese authorities to gain access to documents otherwise denied to offshore regulators.
The FRC completed 37 engagement inspections and another 18 on quality control systems.