Offences Relating to Contents of Auditor's Reports

There is a new offence in section 408 of the new CO relating to omissions in an auditor’s report.

Section 407 of the new CO provides that if the auditor is of the opinion that the financial statements of a company are not in agreement with its accounting records in any material respect, or the auditor has failed to obtain all the information or explanations that are necessary and material for the purpose of the audit (“the specified statements”), the auditor must state that fact in the auditor's report. There are similar requirements in section 141 of the old Companies Ordinance (Cap. 32) but there is no sanction for breach of the requirement. The offence in section 408 will safeguard the reliability and integrity of auditor’s reports and enhance enforcement. A similar offence was introduced in sections 507(2)(a) and (b) of the Companies Act 2006 of the United Kingdom.

Any of the persons specified below commits the offence if the person knowingly or recklessly causes any of the specified statements referred to in the answer to Q2 to be omitted from an auditor’s report:

• if the auditor is a natural person, the auditor and every employee and agent of the auditor who is eligible for appointment as auditor of the company;
• if the auditor is a firm, every partner, employee and agent of the auditor who is eligible for appointment as auditor of the company;
• if the auditor is a body corporate, every officer, member, employee and agent of the auditor who is eligible for appointment as auditor of the company.

Section 393(1) of the new CO provides that only a practice unit is eligible for appointment as auditor of a company. A practice unit means:

1. a firm of certified public accountants (practising) practising accountancy pursuant to the Professional Accountants Ordinance (Cap 50) ("PAO");
2. a certified public accountant (practising) practising accountancy on his own account pursuant to the PAO; or
3. a corporate practice registered under the PAO.

Since enactment of the new CO, the Administration has discussed with the Hong Kong Institute of Certified Public Accountants ("HKICPA") and sought legal advice on the issue. After thorough consideration of relevant information, including the actual operation of the accounting profession, the Administration and HKICPA have reached a common view and are satisfied that the scope of section 408 would cover all certified public accountants who are holders of practising certificates and meet the original policy intent of this provision. The Administration will maintain liaison with HKICPA in monitoring the implementation of the provision and keep in view the need for review in due course.

An auditor who commits an offence under section 408 is liable to a fine not exceeding $150,000.

The requisite mental element for commission of an offence is “knowingly” or “recklessly” causing any of the specified statements to be omitted. For the mental element of “knowingly”, a person would be culpable if, at the time of commission of the offence, he knew and caused the statement to be omitted. As regards the mental element of “recklessly”, 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 make, and that he went ahead despite knowing that. An inexperienced member of an audit team would not be regarded as culpable if, owing to his / her inexperience, he / she genuinely did not appreciate or foresee the risks involved in omitting the specified statements.

No. For an existing company, the new offence applies to omissions in the auditor’s report on a company’s financial statements prepared for a financial year that begins on or after the commencement of the new CO, as the requirements regarding the preparation of financial statements under the new CO apply to the company’s first financial year after the commencement of the new CO and subsequent financial years (section 358). For information on how an existing company’s first financial year is determined, please see the answer to Q25 in "Accounts and Audit".