Criminal Liability - Hong Kong's Auditors In The Firing Line

On 12 July 2012, the Companies Bill was passed by the Legislative Council marking a significant milestone in the development of Hong Kong's company law. The new Companies Ordinance which is expected to come into force in 2014 could signal the start of an uncertain period for Hong Kong's auditors as for the first time they will face exposure to criminal sanctions for "recklessness" in their audit reports.

The introduction of clause 399 raises a number of practical concerns for auditors. Questions that arise from the legislation, which many auditors may wish for clarity upon, include whether an auditor can be criminally liable for:-

the acts and omissions of junior audit team members? failing to obtain all necessary information and audit evidence as a result of say completing the audit under huge time pressure? not carrying out certain audit procedures at the request of the client? placing excessive reliance on representations made by the client's management during the course of the audit? Background

In mid-2006, the Hong Kong Government decided to undertake a comprehensive rewrite of the Companies Ordinance in order to modernise Hong Kong's company law and incorporate relevant law reforms from overseas jurisdictions. The rewrite was viewed as necessary given developments in company law since the last substantive review and amendment of the Ordinance took place in 1984.

The rewrite was led by the Companies Bill Team established under the Financial Services and the Treasury Bureau ("FSTB"). A Joint Working Group was also set up between the Government and the Hong Kong Institute of Certified Public Accountants ("HKICPA") to review the specific accounting and auditing provisions contained in the Companies Bill.

On 26 January 2011, the Companies Bill was introduced into the Legislative Council with the stated objectives of reforming Hong Kong company law with a view to enhancing corporate governance, ensuring better regulation, facilitating business operation, and modernising the law.

One of the more controversial aspects of the Companies Bill was the inclusion of clause 399 which introduced criminal sanctions for auditors. This clause was modelled on section 507 of the United Kingdom Companies Act 2006 and provides as follows:-

Clause 399 – Offences relating to the contents of auditor's report

1. Every person specified in subsection (2) commits an offence if the person knowingly or recklessly causes a statement required to be contained in an auditor's report under section 398(2)(b) or (3) to be omitted from the report.

2. The persons are –

   a. if the auditor who prepares the auditor's report is a natural person –

   i. the auditor, and

   ii. every employee and agent of the auditor who is eligible for appointment as auditor of the company;

   b. if the auditor who prepares the auditor's report is a firm, every partner, employee and agent of the auditor who is eligible for appointment as auditor of the company; or

   c. if the auditor who prepares the auditor's report is a body corporate, every officer, member, employee and agent of the auditor who is eligible for appointment as auditor of the company.

3. A person who commits an offence under subsection (1) is liable to a fine of $150,000.

   Clause 399 creates a criminal offence punishable by a HK$150,000 fine where an auditor or person eligible for appointment as an auditor "knowingly or recklessly" causes the omission of a statement in the auditor's report where (1) they are of the opinion that the financial statements of the company are not in agreement with the auditing records in any material respect, or (2) they have failed to obtain all necessary and material information or explanations for the purpose of the audit. The FSTB has clarified that this is a summary offence separate and distinct from the disciplinary proceedings under the Professional Accountants Ordinance.

   Response from the Profession

   The proposed introduction of criminal sanctions under clause 399 elicited widespread concern from the HKICPA...