New companies ordinance offence in relation to auditors - new
circular issued by the companies registry and technical bulletin
issued by the HKICPA
4 March 2014
The new law
The new Companies Ordinance (Cap 622) (the "new CO") came into force on 3 March 2014. Amongst other things, it introduced a new offence in relation to certain omissions in auditors' reports.
The Companies Registry has recently published a circular to set out the general principles that apply in determining whether an offence relating to the contents of an auditor's report should be prosecuted under section 408 of the new CO or section 16 of the Companies (Revision of Financial Statements and Reports) Regulation (Cap 622F) (the "Circular"). The Hong Kong Institute of Certified Public Accountants also issued a Technical Bulletin on section 408 of the new CO on 24 February 2014 (the "Technical Bulletin").
Key points from the Circular and the Technical Bulletin:
- Section 407 of the new CO provides that if a "person" is of the opinion that the financial statements of a company are not in agreement with the accounting records in any material respect, or if the auditor has failed to obtain all the information or explanations that are necessary and material for the purpose of the audit, the auditor must state that fact in the auditor's report ("the Specified Statements").
- Section 408 provides that the auditor commits an offence if the "person" knowingly or recklessly causes any of the Specified Statements to be omitted from an auditor's report.
- A "person" who commits an offence under section 408 is liable to a fine not exceeding HK$150,000.
- Under these provisions, a "person" includes (i) where an auditor is a natural person, then him/herself and his/her employee; (ii) where an auditor is a firm, its partners, employees and agents who can be appointed as auditor; and (iii) if the auditor is a body corporate, then every officer, member, employee and agent who can be appointed as auditor. The Circular makes clear that this definition is not intended to apply to persons who are merely potentially eligible for appointment as auditor if he/she applied for the relevant professional qualifications or certificates.
- When considering whether to prosecute, the prosecutor must consider: (i) whether the evidence sufficient to justify instituting or continuing proceedings (whether the evidence demonstrates a reasonable prospect of conviction); and (ii) does the public interest require a prosecution to be pursued?
- The requisite mental element for commission of an offence is "knowingly" or "recklessly". The offence does not criminalise negligence.
- For the mental element of "knowingly", knowledge will be inferred from the evidence, but will not be imputed on the basis of the person's professional qualification.
- For the mental element of "recklessly", the test for "recklessness" is set out in the case of Sin Kam Wah v HKSAR  2 HKLRD 375 at 391 C-E. In the context of section 408, a person would be culpable if, at the time of commission of the offence, he was aware that an action or failure to act carried risks that he knew were not reasonable ones to take, and that he went ahead despite knowing that.
- To secure a conviction of the offence all the elements of the offence must be proved beyond reasonable doubt.
- There is no exhaustive list of the considerations to be addressed when making an assessment with regard to public interest, but they include the seriousness of the offence, the level of the suspect's culpability and the attitude, age, nature or physical or psychological condition of the suspect.
In short, it appears that the proposition raised during the consultation and legislative stages of the new CO that prosecutions would not be brought lightly will continue to hold true for the time being. Further, the offence in question involves the possibility of a fine, rather than any potential prison sentence. Nonetheless, the potential reputational ramifications of any prosecution on an accountant, as well as the risks of follow-up professional disciplinary proceedings, cannot be underestimated.
Link to the Circular: http://www.cr.gov.hk/en/publications/docs/ec10-2014-e.pdf
Link to the Technical Bulletin: http://www.hkicpa.org.hk/file/media/section6_standards/standards/Audit-n-assurance/techbull-circular/AATB4.pdf
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.