Hong Kong’s accounting watchdog has handled a substantially higher volume of complaints and investigations into potential audit irregularities over the past five years since it gained more power, its chairman said.
Complaints received by the Accounting and Financial Reporting Council (AFRC) almost tripled to 169 in January this year compared with 56 cases in 2019, while the number of investigations jumped almost five times to 207 from 46 in the same period, according to council data.
“The numbers speak for themselves,” Kelvin Wong Tin-yau, the AFRC’s chairman, said in an interview. “The number of complaints we received from other regulators and from the public has increased over the past five years since we gained more power, which indicates we have established ourselves as an independent accounting regulator.
“Likewise, the number of investigations we can handle is getting higher, which is reflected in our higher headcount and budget.”
The AFRC, formerly known as the Financial Reporting Council, was first set up by the Hong Kong government in 2006. But back then it only handled investigations, while other regulatory functions were carried out by the Hong Kong Institute of Certified Public Accountants (HKICPA).
Following reforms in 2019, the council took over all disciplinary and regulatory inspections of listed companies’ auditors from the HKICPA, while it also received HK$400 million (US$51 million) from the government to expand its headcount from just 25 staff five years ago to 145 currently.
Last year, the council further expanded its role to cover private companies’ accounting and audit-quality problems.
With the added resources and manpower, Wong said the AFRC has been enhancing the quality of the profession by issuing policy research and guidelines, and also establishing strategic cooperations with other local, mainland Chinese and overseas regulators.
According to AFRC inspections over the past three years, local small and medium accounting firms – typically those that audit fewer than 100 listed companies a year – have the “disappointing” tendency to cut corners and showed a failure to learn from past mistakes, displaying an “unacceptable attitude” that compromises audit quality.
Wong pointed out the report was based on a first round of reviews of all accounting firms in Hong Kong in the 2020 to 2022 period.
“The second round of reviews from 2023 to 2025 should have improvements, as we have informed the firms about their deficiencies,” he said.
“The same trend happened in overseas markets, as the first round of inspections usually have more problems as the firms are not familiar with the requirements of regulators and it takes some time for them to climb the learning curve.”
Wong reiterated that the AFRC would work closely with mainland regulators to get documents from mainland accounting firms to conduct its investigations. Currently, it takes about a year for the Hong Kong regulator to get the audit papers needed for its investigations, which is too long, he said.
China’s broadly defined laws on state secrets extend to auditors’ working papers and auditors are currently banned from taking such documents out of the country for inspection by overseas regulators.
However, China’s finance ministry has been assisting the AFRC after an agreement was signed in 2019, and the council has received 18 batches of audit working papers involving 15 cases from the ministry.
Wong is not concerned about the draft rules jointly published by the ministry and the Cyberspace Administration of China on November 2, which require accounting firms to keep their audit working papers and relevant data within proper locations on the mainland.
“The tougher requirements for data-storage locations, in fact, would be helpful when the Ministry of Finance will need to collect documents for us, as the mainland regulators can easily identify where the papers are located,” he said.
China and the United States reached a landmark agreement that allowed the US Public Company Accounting Oversight Board to inspect auditors’ work involving more than 100 Chinese companies in Hong Kong in 2022.
“The AFRC will provide help or facilitation if any overseas regulator wants to audit the work of firms registered with the AFRC,” Wong said.
The AFRC plans to host in the fourth quarter its first regional regulatory forum, which will invite audit and securities regulators from different jurisdictions to discuss how to promote audit quality and exchange of information.
“The forum will provide a platform for peer regulators to learn and share their experiences,” Wong said.
“It will also promote Hong Kong as a competitive international financial centre, and will also tell a good story about why Hong Kong’s independent audit regulatory regime might enhance financial reporting quality and public trust.”