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Regulator Warns Hong Kong Companies About Auditor Resignations

Oct. 27, 2022

Accounting and Financial Reporting Council says exits close to earnings releases are on the rise

Hong Kong’s accounting regulator is sounding the alarm over a surge in auditor resignations a month before or after a company’s reporting period ends.

So-called “late auditor resignations,” which increased to 107 during the nine months ended Aug. 31 from 71 in the same period a year earlier, can jeopardize audit quality, the Accounting and Financial Reporting Council said Thursday.

The resignations leave companies with little time to plan and conduct proper audits before deadlines for announcing audited financial results, the AFRC said, adding the resignations raise concerns about whether stakeholders are adequately informed about circumstances behind the exits.

The regulator looked at auditor resignations from Dec. 1 of last year through the end of August and found that in around 60% of late resignation cases, a company whose financials were being audited made a generic statement saying it couldn’t agree with its auditor on audit fees.

Roughly 30% of resignations occurred because of unresolved audit issues, the AFRC said. The regulator in many cases had questions about the ability of auditors brought in to fill a vacancy to perform audits in limited periods of time.

“The AFRC will continue to monitor closely the late changes in auditor appointments and the audit quality of the relevant entities and will not hesitate to take follow-up actions when appropriate,” Marek Grabowski, AFRC’s chief executive, said in a statement.

Audit firm resignations, and changes in general, are rare in the U.S., where companies are not required to switch firms after a certain number of years.

Hong Kong-based companies including department store Sincere Company Ltd. and business software solutions provider Enterprise Development Holdings Ltd. recently announced resignations within weeks of the close of their reporting periods.

Sincere Company said Ernst & Young resigned as its auditor, effective Dec. 16, 2021. The two parted ways because they couldn’t agree on audit fees for the period ended Dec. 31, Sincere Company said in a financial filing. Sincere Company at the end of March released final results for the 10-month period from March to December of last year, which were audited by Grant Thornton Hong Kong Ltd.

Enterprise Development Holdings on Dec. 16 said Mazars CPA Ltd. resigned, effective that same day, likewise over an inability to reach an agreement on audit fees for the financial year ended Dec. 31, according to a financial filing. In March, Enterprise Development announced annual results for the period that ended in December audited by Hong Kong accounting firm BOFA CPA Ltd.

The companies and the audit firms didn’t immediately respond to requests for comment.

Janey Lai, AFRC’s head of inspection, in a letter on Thursday laid out expectations for auditors in cases in which there are late changes in their roles. Outgoing auditors should outline in detail reasons for resigning and explain any audit issues that——if unresolved——would negatively affect audit opinions. Departing auditors should also ensure shareholders are sufficiently informed by companies about their resignation and alert boards and potentially regulators if they are not.

Incoming auditors, meanwhile, should know why predecessors left and critically assess their ability to perform a quality audit in a limited period of time.

“A change in auditor before the end of their term of appointment may indicate issues in the financial statements of the listed entity or difficulties encountered in conducting the audit,” Ms. Lai said.

“We are concerned that audit quality may be compromised by late auditor resignations because the incoming auditor will have limited time to plan and conduct a proper audit in order to meet the listed entity’s deadline to announce their audited results,” she added.

[The Wall Street Journal]