Attention all auditors, again – HKMA and AFRC enter into new Memorandum of Understanding to strengthen collaboration

Earlier this year, we reported on the introduction of the first joint statement between the Securities and Futures Commission (SFC) and the Accounting and Financial Reporting Council (AFRC) (please see our July 2023 bulletin). More recently, the AFRC entered into a new Memorandum of Understanding (MoU) with the Hong Kong Monetary Authority (HKMA) to strengthen co-operation between the parties (Parties). The new MoU supersedes the previous MoU signed on 19 November 2007.

The new MoU has been expanded to:

• include details on the roles of auditors in the supervisory process of the HKMA;
• include details of the situations where the AFRC will give written notice to or consult the HKMA under the Accounting and Financial Reporting Council Ordinance (Cap. 588) (AFRCO); and
• set out, in a new section, the collaborative arrangements between the AFRC and the HKMA in relation to case referrals and sharing of information.

Since the commencement of the new regulatory regime of the accounting profession on 1 October 2022, the AFRC has been vested with expanded statutory functions to, among others, deal with matters regarding inspection, investigation and discipline of the accounting profession. With the enhanced collaboration with the HKMA, the AFRC’s investigation powers have been further strengthened. This will support the AFRC in its regulatory endeavours to uphold the standards of financial reporting, auditing, and the accounting profession’s role in the banking sector, which is crucial to the HKMA in evaluating the financial resilience of authorised institutions (AIs) and ensuring their stability and soundness. This bulletin summarises the key provisions of the new MoU.

Key takeaways

• Scope: The scope of the MoU has been widened, and now states that both Parties recognise the importance of ensuring observance of proper standards by auditors, and by AIs in their financial reporting to maintain investors’ confidence in Hong Kong as an international financial centre.
• Role of auditors in supervisory process of HKMA: The new MoU specifies that an auditor appointed by an AI is obliged to provide notice to the HKMA in case of qualification or adverse statement on the AI’s accounts, or if they become aware of a matter which adversely affects the financial position of the AI to a material extent or constitutes on the part of an AI a failure to comply with the relevant statutory requirements.
• Collaborative arrangements: The new MoU outlines the HKMA and AFRC’s plans to work more collaboratively to refer matters to one another where they fall in the other Party’s regulatory remit, and to notify one another of any issue that may have a significant impact on the other Party (including the development and publication of new policies and guidelines).
• Situations where AFRC will give written notice to or consult the HKMA: The new MoU provides that the AFRC shall give written notice to the HKMA when initiating an investigation in relation to:
  • a certified public accountant or a practice unit (collectively, Professional Person), to the extent it involves the Professional Person’s provision of services to a person which is an AI or, to the AFRC’s knowledge, is a controller of an AI, has as its controller an AI, or has a controller that is also a controller of an AI (collectively, AI-related Entity);
  • a public interest entity (PIE) engagement or non-PIE engagement where the listed entity in question is an AI or, to the AFRC’s knowledge, an AI-related Entity; or
  • non-compliance of a listed corporation or a listed collective investment scheme (collectively, Listed Entity) which is an AI or, to the AFRC’s knowledge, an AI-related Entity.
• In the above three cases, the AFRC must consult with the HKMA where it wishes to exercise its investigation powers against a person which is an AI or, to the AFRC's knowledge, an AI-related Entity.
• Confidentiality: The new MoU sets out a more detailed framework for maintaining the confidentiality of information exchanged between the Parties, which shall be subject to professional secrecy obligations, statutory duties of confidentiality and the restrictions or conditions on the use of the information imposed by the other Party.

1. Scope of the MoU

The new MoU was entered into on 17 August 2023. Whilst the scope of the previous MoU (signed on 19 November 2007) was mainly procedural in nature with a focus on the role of the AFRC, the new MoU sets out the functions of both Parties in detail and the working arrangements between the Parties in order to ensure efficient and effective co-operation and co-ordination of the Parties’ respective functions. The new MoU includes a statement that “both Parties recognise the importance of ensuring the observance of proper standards by auditors in their professional work and by authorised institutions in their financial reporting to maintain investors’ confidence in Hong Kong as an international financial centre”.

The previous MoU provided a framework to facilitate AFRC investigations or enquiries into auditing and reporting irregularities in relation to a Listed Entity which is an AI or AI-related Entity. The new MoU has been bolstered to cover AFRC investigations in relation to a Professional Person’s provision of services to an AI or AI-related Entity and a PIE/non-PIE engagement where the listed entity is an AI or, to the AFRC’s knowledge, an AI-related Entity.

2. Roles of auditors in supervisory process of HKMA

The new MoU incorporates guidance as to the roles of auditors in the supervisory process of the HKMA. It is noted that, in accordance with the Banking Ordinance (Cap. 155) (BO), the HKMA may require an AI to appoint an auditor or auditors to:

• report on banking returns (sections 50(1)(c) and 63(3) of the BO);
• report on systems of control over the compilation of banking returns or other information, compliance with certain statutory provisions in the BO and, in the case of a locally incorporated AI, the maintenance of adequate provisions (section 63(3A) of the BO);
• report on state of affairs or profit and loss or both, or the adequacy of specific systems of control (section 59(2) of the BO); and
• provide factual findings in respect of the balance sheet, third party deposit liabilities, contingent liabilities and outstanding commitments in relation to voluntary revocation of authorisation of the AI.

Pursuant to the BO, an auditor appointed by an AI is obliged to, among other things:

• provide notice to the HKMA in the case of qualification or adverse statement on the AI’s accounts (section 59A(2)(c) of the BO); and
• report to the HKMA if they become aware of a matter which, in their opinion, adversely affects the financial position of the AI to a material extent, or constitutes a failure of the AI to comply with any prescribed requirements within the meaning of section 157 of the Securities and Futures Ordinance (Cap. 571) (sections 63A and 63B of the BO).

3. Collaborative arrangements

In line with the renewed scope of the MoU, a new section detailing collaborative arrangements between the Parties has been introduced.

Complaints and referrals

The Parties agree that, if they become aware of any matter which may fall within the regulatory remit of the other Party, they shall make a complaint or otherwise refer the matter to the relevant Party for consideration of follow-up actions. In making such a complaint or referral, the Parties shall, subject to applicable laws, use their best endeavours to provide the other Party with all relevant information in their possession and the rationale for the complaint or referral. Either Party who receives a complaint or referral through this arrangement shall, subject to applicable laws, inform the other Party of its decision on the complaint or referral and its reasons therefor.

Sharing of information

The previous MoU contained a section to facilitate the exchange of information between the Parties pursuant to the BO and the AFRCO. The new MoU retains and builds upon this section, with the addition of a provision for the Parties to, subject to applicable laws and to the extent practicable, notify one another of any issue that the notifying Party believes may have a significant implication for the other Party. In particular, this includes the development and publication of any policies or guidelines which are likely to have an impact on the other Party’s regulatory functions.

The Parties also intend to coordinate their training initiatives and organise joint training opportunities to improve the capacity and effectiveness of their staff in performing their respective functions.

4. Situations where AFRC will give written notice to or consult the HKMA

The new MoU illustrates situations where the AFRC will give notice to or consult the HKMA under the AFRCO. Notice shall be in writing, and consultation may be conducted by way or meeting or correspondence.

Initiating an investigation in relation to Professional Persons

Pursuant to section 20ZZK of the AFRCO, if the AFRC initiates an investigation in relation to a Professional Person’s provision of services to a person which is an AI or AI-related Entity, the AFRC will inform the HKMA of this by written notice.

Without first consulting the HKMA, the AFRC will not impose any requirement on an AI or AI-related Entity to:

• produce any document;
• give any explanation or further particulars in respect of a required document; or
• give the AFRC any other assistance in connection with the investigation.

Initiating an investigation in relation to PIE auditors and non-PIE auditors

Pursuant to section 24 of the AFRCO, if the AFRC initiates an investigation in relation to a PIE engagement or non-PIE engagement and the Listed Entity in question is an AI or AI-related Entity, the AFRC will inform the HKMA of such by written notice.

Without first consulting the HKMA, the AFRC will not impose any requirement on an AI or AI-related Entity to:

• produce records or documents;
• give an explanation or further particulars in relation to a record or document produced;
• attend before the AFRC to answer any question relating to any matter under investigation;
• answer any question relating to any matter under investigation in writing; or
• give the AFRC any other assistance in connection with the investigation.

Initiating an enquiry concerning non-compliance of a Listed Entity

Pursuant to section 42 of the AFRCO, if the AFRC initiates an enquiry concerning potential relevant non-compliance of a Listed Entity which is an AI or AI-related Entity, the AFRC will inform the HKMA of such by written notice.

Without first consulting the HKMA, the AFRC will not impose any requirement on an AI or AI-related Entity to:

• produce or give any record or document; or
• produce or give any information or explanation.

5. Confidentiality of information

The new MoU provides a more detailed framework for maintaining the confidentiality of information exchanged between the Parties under the MoU. The Parties agree that:

• any information shared by the Parties under the MoU shall only be used for performing their respective statutory functions and shall be subject to professional secrecy obligations and any relevant statutory duties of confidentiality;
• any confidential information obtained from the other Party shall not be disclosed to a third party without prior written consent from the other Party, except where required or permitted by applicable laws;
• in the event that the receiving Party must disclose information received under this MoU pursuant to a legal requirement under applicable laws, they must notify the Party providing the information as soon as reasonably practicable;
• the receiving Party shall adhere to any restrictions or conditions on the use of the information imposed by the other Party; and
• each Party shall implement necessary safeguards to protect the confidentiality of information exchanged in accordance with applicable laws and the MoU.

Assistance

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