【Securities Regulatory Review】SFC: Auditors' Hasty Resignations Risk Causing Defaults! Recommends HKEX Revise Guidelines to Strengthen Review of Issuers' Resignation Reasons

In recent years, there have been numerous cases of auditors of listed companies resigning hastily. The Hong Kong Securities and Futures Commission (SFC) mentioned in its annual review report on the regulation of listed companies by the Stock Exchange that such abrupt resignations pose significant risks to issuers’ ability to publish timely, high-quality financial information. It recommended that the Stock Exchange strengthen its review of related performance announcements. In some cases, where the exchange reasonably suspects that audit quality may be compromised, it should consider referring the case to relevant authorities for handling.

The SFC stated that whether the investing public can make informed investment decisions depends on the timely availability of reliable financial information. Sudden resignations of auditors are warning signs that there may be issues with the issuer’s financial reporting and corporate governance, and should only occur in extreme circumstances.

The Accounting and Financial Reporting Council (AFRC) expects that auditors of listed issuers should, when feasible, commence audit planning as soon as possible and no later than three months before the end of the financial reporting period. The SFC reviewed 89 cases with 2024 as the performance release year, where auditors resigned within four months before the deadline. Among these, 11 cases involved resignations at the issuer’s request, and 66 cases were due to disagreements over audit fees.

Recommending that auditor resignations be treated as dismissals of auditors

Current listing rules prohibit issuers from dismissing auditors without shareholder approval, but do not explicitly specify whether issuers can request auditors to resign without shareholder approval. The SFC suggested that the Stock Exchange, to prevent issuers from circumventing these rules, should treat cases where issuers request auditors to resign as dismissals under the listing rules.

Disputes over audit fees are sometimes used as vague reasons to conceal the true cause of auditor resignations. The SFC recommended that the Stock Exchange refer to the AFRC’s guidance, which states that listed issuers should agree on audit fees with auditors when they are appointed at the annual general meeting. The Exchange should revise its market guidance accordingly, and after consulting the AFRC, provide further guidance on when reasonable adjustments to audit fees can be made, the mechanisms for such adjustments, and the appropriate disclosures required.

Additionally, the Exchange should consider requiring issuers to explain and disclose the main reasons for differences in fees between the outgoing and new auditors, and how the audit committee ensures that audit quality is not compromised by fee reductions, supported by relevant evidence. If the fee differences between two auditors are minor, the Exchange should consider requiring issuers to explain these as “disagreements over audit fees,” especially when replacing auditors close to the performance release deadline.

Inevitable rushed resignations should prompt enhanced review

When it is unavoidable for auditors to resign hastily, the SFC recommended that the Stock Exchange strengthen its review of the information 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, the Exchange should consider appropriate regulatory measures or even refer the case to relevant authorities for further action.