The Hong Kong Stock Exchange (HKEx) in its recent Enforcement Bulletin raises concern regarding issuers' announcements which only tell part of the story. It warns that disciplinary action may follow if the announcement is misleading as a result of omission of material information. It is no defence that limited information disclosed was not factually wrong.
Resignation announcement is specifically highlighted as a problematic area of such "partial truth" disclosure.
HKEx echoes the concern of the Accounting and Financial Reporting Council (AFRC) that "disagreement over audit fees" has been used as a generic reason to hide deeper underlying, material undisclosed issues that led to auditor resignations.
AFRC issued an open letter to Public Interest Entity Auditors and members of Audit Committees earlier this year. Out of 56 auditor resignations for the period from 1 November to 31 December 2022, AFRC found that generic statements on disagreement over audit fees remain the predominant reason for the changes. However, given auditors should have, during the period, commenced works for the December 2022 year-end with fees agreed in advance, AFRC is unconvinced of the stated reasons.
AFRC is also concerned that there has been a growing number of listed entities using "corporate governance considerations - rotation of firms" as a reason for auditor resignations. It says proper rotation should take place at the time of AGM and not in the middle of the cycle.
AFRC urges outgoing auditors to disclose in detail in their resignation letters significant matters or audit issues, resolved or unresolved, that led to their resignations; and reminds audit committees that it is their duty to ensure the circumstances leading to the auditor's resignation and the basis of selecting the incoming auditor are sufficiently disclosed.
HKEx has also become increasingly sceptical about issuers' generic statements on auditor resignations.
As HKEx explains, the impossibility of agreeing an audit fee may have arisen because the auditor has identified high-risk, problematic areas of concern in the audit which the issuer appears reluctant to address. In such cases, a resignation announcement referring only to the superficial reason is at best unhelpful, and may – by virtue of the important information that has not been disclosed – be misleading or deceptive, rendering disciplinary action and public sanctions necessary.
Directors should further be reminded that it is a criminal offence under the Securities and Futures Ordinance to provide false or misleading information in a material particular. In the matter of DBA Telecommunication (Asia) Holdings Limited [2022] HKCFI 653, the former chief financial officer was disqualified for six years for allowing publication of the company's results announcement which contained a false or misleading statement – despite knowing at the time of publication there were still outstanding audit works and the auditor had not given its agreement.
While it may be tempting to make a generic "partial truth" disclosure to avoid addressing sensitive matters, or to buy time – such as attributing a delay in the publication of audited results to the Covid-19 pandemic – directors must ensure they take care to fully discharge their duties.
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