Hong Kong SFC Recommendation: Strengthen Review of "Listed Companies Changing Auditors," Dismissal of Auditors Requires Shareholder Approval

Why Are Audit Fee Disputes Often Used as a Reason for Resignation?

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On Wednesday (March 18), the Hong Kong Securities and Futures Commission (SFC) issued a review report on the Hong Kong Stock Exchange’s (HKEX) performance in regulating listed companies in 2024.

During the review, the SFC conducted an in-depth assessment of HKEX’s review of internal controls of listed issuers and its handling of auditors’ (audit firms’) hasty resignations. Additionally, the SFC examined HKEX’s general operations, processes, and procedures.

The latest report mentions that HKEX has taken follow-up actions based on recommendations from the previous review report published at the end of 2024. The SFC also identified several areas for improvement this year and provided further suggestions.

Out of 89 cases of auditors’ hasty resignations, 66 were due to “disputes over audit fees.”

The SFC focused on how the exchange handles situations where listed issuers’ auditors resign abruptly. The report states that among the cases of auditor resignations announced within 4 months before financial results are released in 2024, 89 cases involved such resignations, with 66 caused by “disputes over audit fees.”

The report notes that, based on observations from HKEX and the Financial Services and the Treasury Bureau, disputes over audit fees are sometimes used as a broad reason to conceal the true causes of auditors’ resignations.

The SFC mentioned that in 24 representative cases sampled from the 89, there were instances where the exchange’s follow-up on issuers’ inaccurate or problematic disclosures needed strengthening.

The SFC pointed out that in four cases, the reasons disclosed in the announcement did not match those in the resignation letter. In one case, the auditor listed “audit fees, audit schedule, professional risks, and internal resources” as reasons for resignation in the resignation letter, while the announcement cited “the issuer’s failure to reach an agreement with the auditor on audit fees.” The report states that HKEX did not follow up on these discrepancies, considering the disclosures to be not inaccurate.

Furthermore, the SFC noted that some cases of hasty resignations had vague or suspicious reasons. In one case, after the issuer provided a vague response, HKEX deemed the explanation reasonable without further follow-up or requiring the issuer to issue a supplementary announcement. In the previous year, the issuer’s auditor expressed an inability to give an opinion due to significant uncertainties about going concern. However, after changing auditors, the new auditor issued an unqualified opinion. HKEX informed the SFC that, based on the information received, there was no reasonable suspicion of “opinion shopping.”

Recommendations for HKEX to Require Listed Companies to Disclose Reasons for Differences in Fees Between Old and New Auditors

The report also recommends that HKEX consider requiring issuers to explain and disclose the main reasons for fee differences between the old and new auditors, and to publish how the audit committee performs its duties to ensure that audit quality is not compromised by fee reductions, supported by relevant evidence.

If the fee differences between the two auditors are minor, HKEX should consider requiring issuers to explain that the change was due to “disputes over audit fees,” especially when switching auditors close to the financial reporting deadline.

When hasty resignations of auditors are unavoidable, the SFC suggests that HKEX strengthen its review of the data submitted by issuers regarding the reasons for resignation and the announcements issued. Issuers should be required to provide evidence and detailed disclosures, and regulatory actions should be taken if disclosures are insufficient. For example, if issuers or auditors make false statements, HKEX should consider appropriate regulatory measures or even refer cases to relevant authorities.

The SFC emphasizes that hasty auditor resignations hinder issuers from timely publishing high-quality financial data. Therefore, it recommends that HKEX update its market guidance to reduce such resignations. The suggestions include requiring issuers to obtain shareholder approval when requesting auditors to resign and encouraging early discussions between issuers and auditors to clarify audit fees, preventing abrupt resignations due to fee disputes.

The SFC also recommends that HKEX strengthen its review of processes to ensure issuers fully and accurately disclose reasons for auditor resignations and any unresolved audit issues.

Finally, the SFC suggests that HKEX enhance its review of how audit committees fulfill their responsibilities in actively managing financial reporting and audit processes, addressing audit issues, supervising the timeliness and quality of audits, and ensuring accurate disclosures.