The AFRC has published its first Report on the Analysis of the Public Interest Entity Audit Market in Hong Kong. The report provides a comprehensive overview and industry analysis of the PIE audit market. The report was based on an AFRC survey conducted in November 2023 that was sent to all local PIE auditors with at least one PIE engagement during the period from 1 July 2020 to 30 June 2023 and research on market share and audit fee trends from 2018 to 2022.

The report notes that PIE auditors “serve as vital gatekeepers of financial reporting of listed companies in Hong Kong. They play a crucial role in ensuring the credibility of Hong Kong’s capital markets and fostering investor confidence. Their role contributes to cementing the city’s position as an international finance centre and a ‘super connector’ between the East and the West. Undoubtedly, amidst a challenging and complex environment, the role of PIE auditors has become even more critical.”

High staff vacancy and attrition rates

The survey noted a high staff vacancy and attrition rates, particularly at junior grades and found the total number of individuals working in PIE audits was 8,960 as at 30 June 2023 with associates and senior associates comprising 62.4 per cent of the total .

The report noted that the high attrition and vacancy rate “may derail PIE auditors’ efforts to establish stable audit teams and uphold audit quality” and that “it is important to emphasise that a labour shortage should never serve as an excuse for compromising audit quality”.

Demand for PIE audits

The demand for PIE audits is on the rise, something which the report puts down to an increase in the number of listed entities in Hong Kong. The number of listed companies with annual reports published rose from 2,257 in 2018 to 2,465 in 2022.

85.5 per cent of respondents felt that “listed companies perceive audit as a compliance requirement and do not recognise its value”. The report highlights “a lack of understanding amongst listed companies on the broader benefits and value that a quality audit can offer beyond mere compliance.”

Importance of CPD training

The report again highlights the importance of CPD training in contributing to audit quality and refers to the AFRC’s 2022 Annual Inspection Report which identified “continuous focus on enhancing competence and capabilities” as amongst the key factors contributing to improved audit quality of certain PIE auditors.

The report says “the AFRC is concerned with the potential non-compliance of CPD may have on audit quality, and how it reflects the overall learning culture within the profession. The AFRC expects all audit professionals to fully comply with CPD requirements.”

Key messages to PIE auditors

The report includes some key messages addressed to PIE auditors including:

• Ensure staff resources are sufficient before undertaking a PIE audit engagement.
• Ensure sufficient supervision and partner involvement in audit engagements.
• Avoid imposing excessive workload and working hours on staff.
• Allocate appropriate investment in technology and establish policies and procedures for the use of technological tools.
• Actively communicate and demonstrate the value of a quality audit to listed companies.
• Adjust competitive strategy from price-based to audit quality based to ensure audit quality will not be compromised.

In conclusion, the report notes that “fostering a culture that leads to the provision of high-quality audits requires PIE auditors to prioritise continuous investment in human capital, deploy technologies, provide CPD training, foster gender equality in the workplace, and ensure appropriate workload and supervision of audit professionals.”

Conclusion

As strongly suggested by the report, a key concern of any future AFRC investigations and/or disciplinary actions is likely to focus on the level and quality of staffing in a PIE audit engagement. With clients exerting downward pressure on fees, many auditors may feel they have little option but to save on the resource and effort they assign to a task. Whilst the report notes that unfavourable market conditions are one of the factors causing clients to exert downward pressure on fees, the AFRC is unlikely to be sympathetic if an audit fails to spot key risks or is otherwise rushed or incomplete.

It is clear that the AFRC continues to focus its efforts in ensuring PIE auditors meet professional standards to enhance the quality of financial reporting in Hong Kong and will be prepared to exercise its regulatory powers including imposing sanctions to uphold high standards of professional conduct.  The AFRC already cautioned against merely “ticking the boxes” in its 2023 Oversight Report (see Hogan Lovells alerter Ticking the boxes – Hong Kong accountants regulator highlights failings in professional training compliance). In the report, the AFRC noted a high level of non-compliance in the reporting of continuing professional development training, a lack of consultation on anti-money laundering (AML) and counter terrorist financing (CTF) guidelines and a delay in updating professional ethics standards.

PIE auditors should beware of the professional standards that they are expected to meet and regularly review their team structures and internal procedures so that any potential risk could be identified as early as possible.

Our accountants’ liability team at Hogan Lovells has put together a series of measures, ranging from proactive to reactive which can be taken either to mitigate against the risk of investigations, disciplinary action and litigation or ensure the best possible chance of fighting such claims.

These include, for example:

• Training on professional ethics and risk management for employees.
• Taking a close look at the terms of your insurance to see which risks you remain exposed to that may not be covered.
• Reviewing existing practices or procedures to reduce exposure, for example limiting your terms of engagement and adding in suitable disclaimers of liability to minimise risk further, establishing clear policies that outline expectations including circumstances when a situation must be escalated to management to minimise any issues can be promptly addressed when they arise.
• Putting in place adequate measures to identify changes in client behaviours or the discovery of potentially alarming documents which may lead you to question information previously provided by the client; and
• Maintaining close engagement with regulators and seek prudent advice when called upon to make regulatory disclosures.